Abstract

The agency story is that some money managers prefer investing their clients ' assets in well-regarded companies so that if the stock performs poorly the clients will blame the company or the stock market, but not the advisor. If enough people are willing to sacrifice returns when they invest in excellent companies, these investments will earn negative abnormal returns in equilibrium. Another reason to suspect that shares of well-regarded firms may be overvalued and shares of poorly regarded firms undervalued is that stock prices appear to overreact in some contexts. The most-admired decile of firms, as ranked by Fortune magazine's survey of America's Most Admired Companies in years 1982-1995, significantly outperforms the least-admired decile. In the five years after the survey was published, the most-admired decile earned an average annual return of 17.7 % compared to 12.5 % for the leastadmired decile. This result is surprising because the most-admired firms tend to be larger and have a higher market-to-book ratio. Full Text: Copyright Euromoney Institutional Investor PLC Spring 2003 Are the returns to investing in highly regarded firms commensurate with firm riskiness, or are they abnormally high or low? Each possibility has its proponents. Believers in market efficiency would argue that shares of well-regarded firms cannot on average realize abnormal returns. Because these are

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