May

19

Former Tyco International CEO L. Dennis Kozlowski I have been thinking about the performance of companies in crisis. Often crisis is a time of great growth, as often companies in crisis are tarred by the unethical activities of some executive but the basis capital structure and earning power of the business is not affected. Some examples of this are AIG and Tyco, and many of the companies tarred by the back-stating of options, as well as the few companies on the NYSE, where an executive seems to have been too greedy.

There are some million cites on Google for "Crisis" NYSE, and it would be hard to test the overall systematic tendencies and performance of these companies. There is a Delahave index of corporate reputation, which publishes a list of the reputations of the 100 largest NYSE companies. Companies with very bad reputations as of year-end 2006 (with their 2007 performance in parenthesis) include Fannie MAE (+10%), Allstate (-3%), and FORD (+15%).

It would stand to reason that the companies with the worst reputations should have the highest risk premia, and the best should have the lowest.

Another aspect would be the regression bias factor of bad and good reputations being inordinately due to ephemeral factors.

The whole subject calls for a systematic meal for a life time study. See this article on the Delahave Reputation Index is a must read.

Alston Mabry adds: 

But reversalists can take heart in the CS/Tremont Hedge Index, which shows that the most successful category in the long run has been Event Driven/Distressed. Optimists can also derive intense pleasure from the worst performer on the list: Dedicated Short Bias. 

Nigel Davies adds: 

There is a phenomenon in competitive games whereby under-performing participants will outperform in order to reach the standing that accords with their belief about their 'status'. Alternatively, over-performers often find ways to scuttle their own performance in order to reach the comfort of what everyone expects of them. For older players this is the main problem on the road to improvement. The young tend to be immune from such effects as they have yet to 'discover their place'.

I wonder if this same effect is seen in the corporate world, with companies that slip from grace fighting like tigers to recover the status that they believe they deserve. On the other hand, young upstart operations (Google comes to mind) will not know their limits and can leave more respectable rivals in the dust. 


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