Beware the hype, it may end in bad news

They are conquering new markets, developing new technologies, crushing the opposition, and creating extraordinary value for shareholders, while still finding enough hours in the day to promote gender diversity and set new standards for corporate social responsibility. Anyone who follows corporate news – and journalists on the receiving end of a barrage of public relations material, in particular – will be familiar with companies that constantly brag about their amazing performance.

But here’s something interesting. According to a fascinating new paper, not only do most companies routinely fail to deliver on their own hype, but the more they brag about how brilliant they are, the worse they actually turn out to do.

There is a lesson in that for investors. As most people come to realise, anyone that boasts too much should usually be ignored and sometimes actively avoided. They will always let you down.

The days when companies would simply report that sales and profits were up a bit, or not as the case may be, are long gone. Most results statements these days have been sweated over long into the night by teams of highly paid PR and investor relations consultants.

Escalating self-promotion has become the norm within the financial markets, with routine performance described as stellar, and even a mild upside surprise as outstanding or amazing. No one thinks they can get away with just being average anymore. The trouble is, the reality often doesn’t live up to the description. A new paper from three academics at the University of Missouri, led by Pratik Korthri, looked at how much of the bragging was actually justified.

They took all the firms in the S&P 500 that used extremely positive language to describe their performance. That is a slight subjective judgment, of course, but they standardised it with a list of adverbs that they considered hyperbole – for example, the terms “amazing” “sensational” or “impressive” in press releases or results statements were enough to put you in the braggart camp.

They then crunched the numbers for how those companies actually performed over that period. The results? The study found that only 18pc of those firms actually increased shareholder value, while nearly 75pc turned in a performance that was insignificantly better, or worse, compared to their peer group. More worryingly, the remaining 7pc actually destroyed shareholder value.

In other words, most of the bragging turned out to be completely irrelevant. There was nothing “amazing” or “sensational” about how they were doing. In fact, it was rather uninspiring. And in some cases, it was actually a warning sign of trouble looming. “Our findings show that unjustified claims of remarkable performance are the norm,” the study argues.

Anyone who follows the markets will see that happening all the time. Volkswagen was always telling everyone at tedious length about what a fantastic corporate citizen it was, while at the same time manipulating its diesel test results. Perhaps the worst offender of recent times, at least in the UK, was the Royal Bank of Scotland’s Fred Goodwin, a relentless self-promoter. In a 2006 release accompanying its figures, it bragged that it was “bigger than Sony and Apple combined” and made “more profit from the US than Mcdonald’s do globally”. We all know what happened next – suffice to say, RBS is no longer more valuable than Apple.

In truth, most firms fail to live up to their own hype. In many cases, that is fairly harmless. As the study argues, however, it can also sometimes be more sinister. A firm might well be boasting excessively to draw attention to itself, and lift its share price so the directors can cash in their options.

But that is always dangerous. If the company is genuinely performing well, the markets will notice in time, and push the share price up without the hype. The conclusion? When a business routinely proclaims how great it is, investors should just ignore it. It is probably nonsense. And if it becomes too over-the-top, then it is time to bail out of the shares – because they are probably heading for a fall.

‘Our findings show that unjustified claims of remarkable performance are the norm’