STOCK PRICE REACTION TO SUPPLY CHAIN MANAGEMENT ADVERTISEMENTS AND COMPANY VALUE, THE

Filbeck, Greg

INTRODUCTION

Supply chain management has been hailed in the popular and academic presses as a cost saving and value-creating process (e.g., Challener 1999; Chapman, Ettkin, and Helms 2000). It is also seen as a critical driver of share holder value and competitive differentiation (D'Avanzio, von Lewinski, and Van Wessenhove 2003). Universities have begun offering majors and minors in supply chain management with close to six figure starting salaries for MBAs in this area (Francis 2000). Companies that adopt supply chain management are often viewed as industry leaders employing best in practice management techniques. Those companies that adopt supply chain management are possibly deserving of some praise; however, it is unclear whether the market perceives such practice as being "value added." While several studies document lower costs and higher profits from supply chain management, they have not clearly documented whether they create value for their shareholders (Quinn 2000). Effective management of the supply chain can create cost reduction and sales expansion opportunities, and both of these results should translate to higher profits and greater shareholder value. The problem is linking supply chain activities to increased company value. It would stand to reason that as firms become more sophisticated and adept in managing supply chain activities, then the results should be reflected in the value that investors place on the company's stock. In this paper, we examine the stock price reaction to announcements that a firm has adopted tools, techniques, and processes that are linked to creating supply chain efficiencies and enhancing customer service. The adoption of supply chain-enhancing tools is evidenced in this study by a given company being specifically cited by providers of supply chain technology, software, and systems. The citations appear in supply chain and logistics publications and trade magazines via press releases or advertisements. For example, when a provider of RFID technology issues a press release that is carried in a supply chain publication stating that Firm 'X' has installed the RFID throughout their system, this event becomes part of our sample. In this study, we also investigate the extent to which the strength of the stock price reaction is affected by the certainty of the publication date of the periodical.

MOTIVATION AND LITERATURE REVIEW

The Link between Managerial and Financial Performance

The inference by investors that well-managed companies (e.g., in this study, those adopting supply chain management systems, software, and technology) are excellent investment opportunities is something that market analysts have previously observed and often cautioned against (Arnott 1983; Bernstein 1956). Among the first to sound this warning to investors was Bernstein (1956) who studied whether firms categorized as "growth companies" were in fact "growth stocks." Based on a sample of 33 firms, Bernstein's conclusion was that "superior financial results are apparently not the fortuitous outcome of being a member of a growth company." Arnott ( 1983) argued that a company's high stock price can be attributed to the market's assessment of the perceived risk of a firm. In particular, Arnott found that the long-term performance is a result of investing in companies that are viewed as being high risk.

Studies (dayman 1987; Kolodny, Laurence, and Ghosh 1989) of companies described by Peters and Waterman (1982) in their best selling book as excellent concluded that the "excellent" firms did not outperform the overall stock market, or a control sample of similar firms, and that investors could not achieve excess returns with ex-ante information about the excellent firms. It can also be noted that some of these excellent companies have since gone out of business.

Other studies have found that investing in well-managed companies can result in abnormal risk adjusted returns. For example, Filbeck, German, and Preece (1997) found that an investor holding a well-diversified portfolio can earn superior returns by investing in Fortune's most admired firms. They also demonstrated that both the raw and risk adjusted returns of most admired firms were significantly higher than the returns on the companies with the lowest ranking in the Fortune survey. Similar results were also found by Filbeck and Preece (1995) who showed that an investor can outperform the British stock market with a portfolio of stocks from the Economist's most admired list.

More recently, Filbeck and Gorman (2000) evaluated the investment performance of the companies that are "Built to Last," as determined by Collins and Porras (1994). Filbeck and Gorman found that the companies deemed visionary by Collins and Porras did outperform both the market and a portfolio of less visionary companies prior to 1989 when Collins and Porras made their assessment of which companies are "Built to Last." However, in the years following this assessment, the visionary companies failed to outperform the market.

This paper will continue the thrust of the research described above, as we seek to assess the extent to which the market places a value on the attempts by companies to enhance their supply chain competence through the adoption of supply chain management-enhancing tools.

Supply Chain Management

Supply Chain Management (SCM) has become one of the premier strategies of the 21st century as businesses look to reduce costs and penetrate global markets. A recent research study provides evidence of the correlation between companies' financial success and the depth and sophistication of their supply chains (D'Avanzio, von Lewinski, and Van Wessenhove 2003). Importantly, supply chain depth and sophistication often comes as a result of the adoption of the state-of-the-art information and systems tools provided by supply chain consultants, software, and MIS firms. The essence of the SCM approach is the coordination and integration of firms and functions involved in the process of creating products and delivering them to ultimate consumers. A study conducted early in the evolution of the supply chain management discipline cites SCM as one the three most important management practices for determining world class performance (White 1994).

A supply chain encompasses all the activities associated with moving goods from the raw material stage through to the end-user (Mentzer et al. 2001). The supply chain is composed of a plethora of firms ranging from software providers to manufacturers to truckers to retailers and wholesalers. The critical element of the supply chain approach is to manage the entire supply chain as if it were a single organization. This requires careful attention be placed on managing the relationships, information, and material flow across organizational boundaries in an effort to cut cost and enhance flow. It is generally agreed that three important goals drive the supply chain management approach: 1) reduce the net landed cost of the product to the ultimate consumer; 2) increase customer satisfaction, thus solidifying customer loyalty and market share; and 3) increase profitability of all firms across the supply chain. Several authors writing in the inaugural issue of Supply Chain Management Review suggest that if the key principles of supply chain management are applied correctly, then supply chain partners would be able to "enhance revenue, control costs, increase asset utilization, and improve customer satisfaction." (Anderson, Britt, and Favre 1997). Thus, a strong motivation for firms to adopt the supply chain management approach is quite simply to improve the firm's financial performance while also enhancing customer loyalty and market share. Min and Mentzer (2004) suggest that "managers should be constantly mindful of the finding that SCM activities pay off economically....successful implementation of SCM improves business performance of participating firms and the supply chain as a whole." It might be assumed that firms in the forefront of adopting supply chain management as a key strategic thrust would be those with enhanced profitability, faster revenue growth, larger market shares, and higher stock prices. However, there is limited evidence concerning the impact of SCM practices on company stock value, with perhaps a bit more substantiated evidence regarding the impact on market share. For example, lack of supply chain efficiencies has been cited as one of the major factors leading to the downfall and bankruptcy declaration by Kmart Corporation (Konicki 2002).

Although there has been very little formal research to link the adoption of SCM strategies to stock value, there is some anecdotal evidence that such a linkage exists. A study conducted at the Georgia Institute of Technology found that a company announcing a supply chain disruption, such as a production or shipment delay, will experience a stock price fall that averages 8.62% on the day of the announcement and can drop as much as 20% over the next six months (Hicks 2002). PETsMART revenues have reportedly grown at a rate of 22% annually after having linked its supply chain of global vendors via collaborative groupware over an extranet (IBM 2002). Fujitsu, a Japanese chipmaker, speculates that the adoption of supply chain management practices in 2002 will result in increasing the firm's return on equity to 10% (Anonymous 2002).

Another example is Seven-Eleven Japan (SEJ). SEJ is Japan's largest convenience store retailer, operating more than 8,200 stores. Many experts attribute much of SEJ's success to effective supply chain management. The company has an extremely agile logistics system and state-ofthe-art systems for determining market demand and communicating with suppliers. On average, each of their stores turns inventories about once per week. For seven consecutive years the company has posted the highest level of operating income in the Japanese retail industry. From 1996 to 2000, SEJ's shareholder value increased by 266% and a 100 yen investment in SEJ stock in 1980 would have been worth 300,000 yen in 2000 (Lee and Whang 2001).

Recent new evidence suggests that the lack of supply chain performance can have a negative impact on shareholder value. Based on a sample of 1,1OO supply chain "glitches" (production or shipment delays), it was estimated that that companies will suffer an average drop of 7.5% in stock price when they announce the glitch. The study also found that an average drop of 18.5% occurs when stock price performance was measured starting two quarters before and ending two quarters after the glitch announcement (Singhal and Hendricks 2002). These findings would suggest that significant shareholder value can be lost through ineffective management of the supply chain. Alternatively, the results imply how much could be gained through effective supply chain management.

Stock Price Reaction to Information on the Adoption of Supply Tools and Technology

Various studies have analyzed the market value effects associated with marketing - and/or advertising-related announcements. A review of these studies provides evidence of two primary directions within this field of study - one focusing on advertising-related announcements and one focusing on recognition-related announcements. Advertising-related announcements that have been studied include corporate name changes, changes in advertising expenditure levels, the use of celebrity endorsers, brand leveraging, the adoption of new slogans, and the use of event sponsorship. Recognition-related announcements that have been studied focus on awards for industry-specific achievement in areas such as societal performance and quality improvement.

Advertising-Related Announcements

Horsky and Swyngedouw (1987) find excess returns for firms when announcing a corporate name change. My les (1990) demonstrates that announcements of higher (lower) advertising expenditures resulted in an increase (decrease) in shareholder value. Agrawal and Kamakura ( 1995) analyze the market value effects associated with the announcements of 110 celebrity endorsement contracts. Results indicate that investors seem to positively value the use of celebrity endorsers in advertising. Mathur, Mathur, and Rangan (1997) examined the potential role of an individual celebrity endorser in creating positive value for the client firm where some of the positive value may come at the expense of competing firms. Results indicated that a celebrity endorser positively influences the profitability of the endorsed firm. Lane and Jacobson (1995) provide evidence that stock market reaction to brand leveraging announcements depends on brand attitude and brand name familiarity. Mathur and Mathur (1995) demonstrate the positive effects of advertising slogan change announcements on the market value of firms. Miyazaki and Morgan (2001) provide evidence that event sponsorship creates value for participating firms.

Recognition-Related Announcements

Research has provided evidence that companies recognized for exemplary social performance experienced positive financial returns. For example, evidence of abnormal returns were noted for first-time firms named to Working Mothers' list of "Most Family-Friendly Companies" between 1989 and 1994 (Murrell 2001). Hendricks and Singhal (1996) and Przasnyski and Tai (1999) study the effect quality improvement awards have on financial performance. Hendricks and Singhal (1996) find the stock market reacted positively to the announcement of quality awards, with particularly strong reaction for smaller firms and for firms winning awards from independent associations. Przasnyski and Tai ( 1999) find mixed results when studying the financial performance of Malcolm Baldridge National Quality Award winners. As a group, the winning companies underperformed the market by 31.2%. Only four of the 17 award-winning companies included in the study had positive annualized excess returns. The authors rationalized that such an award was achieved over several years' work, with winning a mere formality that was "expected" by the market.

The Linkage of Supply Chain Enhancement Products to Performance

The backbone of supply chain business structure is information technology (IT) which is used to acquire, process, and transmit information among supply chain partners for more effective decision making. IT can be viewed as serving as an essential enabler of supply chain management activities (Sanders and Premus 2002) Further, IT appears to play a critical role in facilitating improvements in both supply chain efficiency and effectiveness (Kent and Mentzer 2003). As Trent (2004, p. 54) points out, "what separates companies that achieve real supply chain benefits from those that don't is a commitment to four pillars of supply chain excellence: human resources, organizational design, information technology, and organizational measurement." A vast majority of "products" offered by supply chain vendors are focused on the four pillars discussed by Trent, particularly in the realm of IT and measurement. Thus, it can be inferred that firms adopting the latest state-ofthe-art approaches in IT, modeling, optimization, and software are those that will be most likely to improve their own performance as well as that of their entire supply chain.

Since this research examines the publicizing of the adoption of the latest supply tools and technology, an important outcome of this research effort will be to help establish the extent to which investors perceive a value in a company's efforts to enhance their supply chain's performance. The announcement, by the supplier (software firm, IT provider, consultant, optimizing model provider, etc.) of a customer company's adoption of supply chain management tools, techniques, or models provides a signal to the market that the company is willing to invest in supply chain enhancements. The discovery of positive financial returns associated with the adoption and subsequent communication of supply chain management tools and techniques would provide support for the notion that investors link supply chain expertise to overall company success and returns. It would also suggest that such announcements should be given consideration for inclusion into a firm's marketing strategy. Positive results might indicate that joint efforts by supply chain management tool providers and users would be in the best interests of both parties. One of the major challenges of supply chain managers is to capture the attention of 'C'-level (CEO, COO, CFO, etc.) executives as to the profit impact of supply chain investments and their impacts on the company's fmancials. Thus, if positive financial returns are associated with increasing use of supply chain tools and techniques, then top managements may be more likely to investigate and accept investments in supply chain enhancing technology.

DATA AND METHODOLOGY

Sample Firms

Our sample consists of companies that adopted a supply chain management product, e.g., (technology, hardware, software, IT, model, etc.) between 1995 and 2000. The adopting firms are identified by their mention in advertisements and press releases placed by suppliers of supply chain management-enhancement products. Many of the companies (e.g., SAP, Red Prairie, and JD Edwards) that market supply chain products place advertisements and news releases in trade journals such as Inbound Logistics, Warehouse Management, and Logistics Management and Distribution Report and supply chain publications such as Supply Chain Management Review. These communications are used to announce that clients are using their software, models, IT products, etc. to enhance the effectiveness of the client's supply chain management operations. We reviewed the above mentioned trade journals and supply chain publications for these types of announcements and advertisements.

Methodology

In earlier studies that examine the performance of companies with superior reputations based on seemingly superior management, comparisons of the holding period returns for the well-run companies were made relative to matched sets of firms and some stock market index. Using this methodology was possible because there was a common publication date for the book or magazine that was making the claim of superior management. As such, the ex-ante and ex-post holding periods were the same for all of the companies, i.e., the publication date. In this study, the adoption of SCM occurs on different dates for the different firms in our sample. This makes creating meaningful holding period returns problematic. Instead, we employ event study methodology to gauge the relative returns of the SCM adopting firms against the market index.

We examine the stock price performance of the adopting companies in the days surrounding the announcement date to infer any information content of the announcement to adopt supply chain management. For firms to be included in any of the samples, the following criteria must be met:

(1) The common stock of the sample firms must have traded 330 days immediately prior to and after the annual announcement dates.

(2) The sample firms must have return records on the CRSP Daily Combined Return File.

(3) Large-scale confounding events (dividend changes, earnings announcements, stock splits or dividends, mergers or acquisitions announcements, capital structure changes, and specially designated dividends) must not occur within two days of the annual announcements dates.

Stocks with incomplete or missing data will be excluded from the study. Standard event methodology is used to generate standardized abnormal returns. We will utilize the method of standardizing abnormal returns as discussed in Patell (1976), which is widely used in event studies. By use of the market model, we obtain estimates for expected returns. For each announcement of the employment of supply chain management, the values for the parameter estimates are calculated over the period (-330,-? 1 ) to determine expected returns during the interval (-70,+7O). We assume the capital market response to adoption announcements occurs during a three-day period (-1,+ I). The announcement date of the adoption of SCM, day O, is defined as the earliest date that the announcement appeared in a trade journal as discussed above. Appropriate z-test statistics will be calculated based on tests of the standardized abnormal returns as well as t-tests for the Generalized Sign Test for comparing positive versus negative returns (see Cowan 1992 or Sprent 1989 for a detailed explanation of this test). The details of the methodology are described in the Appendix.

Data

The advertisements placed by the suppliers of the supply chain/technology services were not necessarily attempting to explain that a given client was going to improve supply chain management processes; rather they were often focused on touting themselves by disclosing their more prominent customers. It was not uncommon to see the same ad placed in consecutive issues of a magazine or in nearly simultaneous issues of different magazines. In those cases where a company received multiple mentions by the same supply chain service provider, we only included the first of these advertisements.

This use of magazine publication dates as announcement dates is quite unusual and is in fact something that other scholars have cautioned against (Cheney, Devinney, and Winer 1991; Mathur and Mathur 1995). Unlike a daily publication such as the Wall Street Journal with a precise publication date identical to its distribution date, the time between the stated publication date and the distribution date may vary from issue to issue in the trade magazines used in this study. Unfortunately, the time between the stated publication dates and the distribution dates for these magazines can range from the distribution dates being as much as two weeks before or after the stated publication date.

To counter this problem, we have divided the sample into three sub-samples. The first category includes those publications for which our university library has identified the exact day of receipt of the magazine. The second category includes those publications that the exact date of receipt was not known, but the publication had an established record of distributing its issue at fairly predictable times before or after the stated publication date. This track record allows us to make a fairly accurate estimate of the distribution date. The third category includes those publications that had greater uncertainty about the interval between the distribution date and stated publication date, such that our estimate of the distribution date was not made with as much confidence. The number of observations in each of the three sub-samples was 52, 55, and 140 respectively. In all cases, the advertising closing date was available for each issue and was used as a guide to discern questionable distribution dates.

RESULTS AND CONCLUSIONS

The results from the event study are displayed in Tables 1 through 3. Generally, we observe that the more certain we are about the distribution date, the more significantly positive is the stock price reaction to the announcement. For the sample of advertisements for which there are well-known publication dates (Table 1), the cumulative abnormal returns for the three-day window (days -1 through +1), are positive and significantly different from zero at a 1 % level of significance. The Generalized Sign Tests indicates that the number of positive returns differs from the number of negative returns at the 1% significance level in the three-day event window. While statistically significant results are not obtained in any of the other time periods leading up to the event dates, we do observe statistically significant negative and positive returns in the periods (+2,+5) and (+6,+10). Our suspicion is that because of possibly delays in disseminating information to the market place, the markets reaction actually carries over a longer period of time beyond the three-day event window.1

As reported in Table 2, when we add those observations where the estimate of the publication date is less well known but somewhat predictable to the sample of firms from Table 1, we obtain similar results. As we would suspect, the level of significance is lower as more events are added with less secure event dates. When the second group was tested on its own merits (excluding the first group), the statistical significance disappears.

When the advertisements for which there is considerable uncertainty regarding their initial public appearance are added to the sample, there are no longer any significantly abnormal returns to report during the three-day event window. We also see in Table 3 that the number of observations in this last category exceeds those from the other two categories combined.

Based on these results, we can presume that the market perceives that the adoption of supply chain management-enhancement tools, models, and IT adds value to the shareholders. This result should be of interest not only to the shareholders of adopting and non-adopting companies, but also of interest to the providers of supply chain management-enhancement products and services who seek to convince the non-adopting companies of the benefits of supply chain management.

The results of this research help bring focus to the value of supply chain management and to the impact of supply chain tools and methodologies for improving the supply chain. As the results show, there is some level of association between the recognition that a firm is adopting supply chain-enhancing approaches and the value that investors place on the company. This information is valuable from a number of perspectives. First, it speaks to the importance of supply chain management as a key factor influencing company performance and as a result, company value. If investors respond favorably to the announcement that a company is pursuing a path of improving its supply chain, then there would appear to be greater recognition of the value of effectively managing supply chain activities. This is an important conclusion, as supply chain executives are evervigilant for ways of focusing top management's attention on the importance of the supply chain function. These findings supply important ammunition for supply chain executives as they make the case for new investments in supply chain assets, software, and information technology.

Second, the findings suggest that both providers and users of supply chain-enhancement products and services can benefit from broader communication of the use of such items. For the providers, the value of their products and services should be enhanced as users recognize that the market and investors value these supply chain-enhancing tools. For the users, the fact that there is perceived value in the company as they adopt new supply chain tools is valuable because the adoption can be broadly marketed as a way to heighten company value perceptions.

The results make a contribution to the small, but growing body of knowledge that suggests that supply chain effectiveness and efficiency does affect company profits and value. Several of the studies on supply chain glitches demonstrate how a supply chain problem directly translates to lower stock values on the day of the glitch as well as for many days after. This research puts a positive "spin" on the supply chain by showing that investors value the fact that companies are making attempts to improve their supply chain through the application of supply chain-enhancement tools and technology.

These results also are of interest because of their methodological implications. Many researchers employing the event study methodology have been reluctant to use many media sources other than the Wall Street Journal as a source for announcements (see Huberman and Regev 2001 for an exception). However, the results from this study provide some evidence that other announcement date sources besides the Wall Street Journal are perhaps a viable data source, particularly when the announcement date of the event is known with some certainty. This may allow researchers to examine the value-creating implications of a much wider variety of corporate activities than have been studied previously.

EXTENSIONS FOR FUTURE RESEARCH

Data on sector and institutional-investor ownership percentages will be collected from the Standard & Poor's Stock Guide. Company size and the market to book ratio are obtained from Compustat.

The null hypotheses for the cross-sectional regression of equation (1) are that each coefficient is zero. The results from this regression would be of interest to several parties. Obviously, investors who become aware of a supply chain management adopting firm with characteristics identified by the regression as being associated with positive residual would be wise to consider these firms as particularly worthy investment opportunities. Similarly, firms with these same characteristics who have yet to adopt supply chain management should rethink their status. Beyond that, providers of supply chain management services may consider targeting firms with these characteristics and use the results from the regression to persuade these companies to adopt supply chain management.

In addition to regressing the residuals, the stock price reaction can be tested for other sub-samples that could be created according to the publication that the advertisement appeared, how many different companies are named in each advertisement, the different types of providers of supply chain management services, and the different economic sectors/industries in which the adopters do business. It's conceivable that the positive abnormal returns found are concentrated in only a few of these sub-samples.

SUMMARY

Our study provides potentially useful information to managers and investors. Managers contemplating spending time and resources evaluating and adopting chain management-enhancement tools and technologies, will have a better sense of the effect of adopting supply chain management on shareholder wealth. Current and prospective investors may have a better ability to choose among alternative investment opportunities by observing which ones have begun using supply chain management improvement initiatives. The results of this study also suggest that the world is perhaps becoming more cognizant of the powerful impact of effective supply chain management approaches on company value. Importantly, the results should facilitate the efforts by supply chain executives to educate top management as to the importance of a well-managed supply chain.

In addition, this study is one of the few that has employed the event-study methodology using announcements from a media source other than a daily publication in general and the Wall Street Journal in particular. Our finding of statistically significant abnormal returns from advertisements using monthly and bimonthly trade magazines and supply chain publications may encourage other researchers to pursue other nontraditional sources of information announcements of potential interests to the capital markets.

1 We alternatively use the time series standard deviation method (see Brickley, Dark, and Weisbach, 1991, as an example of the use of this method) and obtain similar results. This alternative model does not take into account unequal return variances across securities, but does avoid problems associated with cross-sectional correlation of security returns.

NOTES

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by

Greg Filbeck

University of Wisconsin - La Crosse

Raymond Gorman

Miami University

Timothy Greenlee

Miami University

and

Thomas Speh

Miami University

ABOUT THE AUTHORS

Greg Filbeck is Senior Vice-President at Schweser Study Program and Adjunct Professor of Finance at the University of Wisconsin - La Crosse. Greg received his Ph.D. from the University of Kentucky. Prior to joining Schweser, he taught in the Finance departments of the University of Toledo and Miami University. Greg holds the Certified Financial Analysts (CFA) designation and his research interests include the relationship between overall management performance and financial performance, the predictive value of learning and teaching styles, and behavioral finance.

Raymond F. German is a Professor of Finance and Associate Dean at Miami University's Richard T. Farmer School of Business. His research interests include environmental finance, capital structure, the effect of regulation on the financial aspects of regulated firms, and behavioral finance. He is a past editor of the Mid-American Journal of Business. Ray received his Ph.D. from the University of Indiana.

Timothy B. Greenlee is Associate Professor of Marketing in the Richard T. Farmer School of Business at Miami University. He received his Ph.D. from The University of Rhode Island. He has published work in the Journal of Business Research, Social Marketing Quarterly, Health Promotion and Practice, and the Journal of Marketing for Higher Education. His research interests include "big event" advertising effects, marketing to diverse audiences, behavioral change processes and social and cause-related marketing.

Thomas W. Speh is the James Evans Rees Distinguished Professor of Distribution at the Richard T. Farmer School of Business Administration at Miami University (Ohio). He is a past president of the Warehousing Education and Research Council and the Council of Logistics Management (2003). He received his Ph.D. from Michigan State University. He has conducted research and consulting projects in supply chain performance measurement, warehousing cost analysis, logistics outsourcing, and reverse logistics.

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