Strategic Management Journal

Strat. Mgmt. J., 26: 461–471 (2005)

Published online 11 March 2005 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.457

THE INFLUENCE OF THE FINANCIAL PRESS

ON STOCKHOLDER WEALTH: THE CASE OF
CORPORATE GOVERNANCE
JONATHAN L. JOHNSON,1 * ALAN E. ELLSTRAND,1 DAN R. DALTON2
and CATHERINE M. DALTON2
1
Sam M. Walton College of Business, University of Arkansas, Fayetteville, Arkansas,
U.S.A.
2
Kelley School of Business, Indiana University, Bloomington, Indiana, U.S.A.

This study examines the impact that the publication of ratings of boards of directors by the
business press has on stockholder wealth. We report findings from an event study of price
reactions to the publication of Business Week’s 1996 and 1997 ratings of boards of directors of
U.S. corporations. As hypothesized, favorable ratings resulted in significant positive abnormal
returns after controlling for market effects and confounding events, with only novel information
explaining statistical variance. Contrary to expectations, unfavorable ratings also resulted in
positive abnormal returns. Copyright  2005 John Wiley & Sons, Ltd.

Very few investors have immediate access to the
information they use to make investment decisions,
with information flowing to them through a vari-
ety of intermediaries, an important class of which
is the financial press. The academic community has
proposed a variety of roles for the financial press,
which we classify into two general, not necessarily
incompatible, categories (e.g., Deephouse, 2000).
The first category contains those perspectives that
treat the press primarily as an information bro-
ker, recording and disseminating information about
business activities. The second category consists of
approaches that regard the press as an active par-
ticipant in the development of society’s awareness,
understanding, and evaluation of businesses and
business practices (Pollock and Rindova, 2003;
Hayward, Rindova, and Pollock, 2004).
These perspectives are applicable to reporting on
many different business issues, including the focus
of this study: corporate governance. Although arti-
cles on the boards and governance practices of spe-
cific corporations are not uncommon, two reports
published in recent years present a unique oppor-
tunity to examine the consequences of financial
reporting in the context of corporate governance.
In 1996 and 1997, Business Week published cover
stories that are well suited to examination by both
the information brokering and social constructivist
approaches. The Business Week stories identify
the 25 ‘best’ and 25 ‘worst’ boards of directors
of publicly traded U.S. corporations, based on a
combination of data gleaned from publicly avail-
able sources and ratings collected through surveys
of professional investors and other corporate gov-
ernance experts. In this study, we examine the
consequences for shareholders of firms included
in those articles in the light of these theoretical
perspectives.

Keywords: corporate governance; boards of directors; THE PERSPECTIVES

financial press
*Correspondence to: Jonathan L. Johnson, Walton College of
Business, University of Arkansas, Fayetteville, AR 72701, In the extreme of the information brokering per-
U.S.A. E-mail: jonjohn@walton.uark.edu spective, the role played by the press is tacit or

Copyright  2005 John Wiley & Sons, Ltd. Received 28 October 2002
Final revision received 30 October 2004
462 J. L. Johnson et al.
unacknowledged, as for example in studies that
use the publication of stories simply as indica-
tors of the event itself. In such case, the press is
regarded as a passive, invisible conduit of infor-
mation. Another approach, one that is amenable to
disciplines grounded in rational models of human
behavior, has regarded members in the press as
information mediaries who act as ‘expert monitors’
(Pollock and Rindova, 2003: 631), or information
middlemen (e.g., Bigalaiser, 1993), procuring and
assembling information for sale to their audiences.
On this account, media organizations are essen-
tially brokers competing in a market for finan-
cial information, deploying specialized resources
to collect, assemble, market, and sell information
on business-related issues. Success in the mar-
ket for financial information is presumably based
on the quality of the goods—i.e., information
that leads to investments that generate returns. To
consistently publish unreliable information would
lead readers relying on that information to make
unprofitable investments, thus risking the publica-
tion’s own valuable reputation and sending read-
ers to alternative information providers. Added to
this market discipline are journalists’ professional
norms to ‘record thoroughly important events,
issues, and opinions about them for the public’
(Deephouse, 2000: 1095).
In the context of corporate governance, the
press brokers information on boards of direc-
tors’ legal fiduciary responsibility to protect stock-
holders from managerial abuses. Most theories
of corporate governance, even including compet-
ing views such as managerialism and agency the-
ory, accept that at least some agency costs are
inevitable, and there will be variance in boards’
effectiveness in managing those costs, to the extent
that boards are not culpable themselves. A vigi-
lant financial press may act as one check against
abuses by managers and/or directors, by investigat-
ing and reporting on governance matters, enabling
informed investment decisions. The information
brokering role is fulfilled by the Business Week
stories in the sense that data from numerous and
varied sources, including sources not previously
publicly available are gathered, analyzed, and pre-
sented to readers.
Legitimacy is a focus of the social construc-
tivist perspective (e.g., Pollock and Rindova, 2003;
Deephouse, 2000; Zuckerman, 1999; Lamertz and
Baum, 1998), and the financial press can play an
Copyright  2005 John Wiley & Sons, Ltd.
active role in both creating and applying the stan-
dards that define legitimacy. In the context of cor-
porate governance, there is uncertainty even in the
academic world about what constitutes appropriate
roles, actions, and attributes of boards of direc-
tors (e.g., Westphal, 1999; Johnson, Daily, and
Ellstrand, 1996), uncertainty that extends into the
investor community. Investors’ understanding of
what constitutes acceptable corporate governance
practices may be grounded in a variety of sources,
including the financial press.
The degree and kind of media coverage given
to a firm sends signals to investors over and above
the information being reported. By selecting spe-
cific issues and firms to report on from an unlim-
ited array of choices, the press ‘sets the agenda’
(McCombs, 1992) for the public, implicitly iden-
tifying which issues and firms are important. Sim-
ply being included in media reports may confer
a certain degree of legitimacy to firms (Zucker-
man, 1999), but the tenor of the story may also
contribute or detract from legitimacy (Pollock and
Rindova, 2003). The process tends toward non-
recursion as media coverage begets public inter-
est, which begets additional media coverage. The
media may further influence legitimacy by quot-
ing or citing experts or reporting on the actions
of respected managers or professionals, many of
whom had a vested interested in the governance
of the firms they rated, providing ‘social proof’ of
the legitimacy of a company or practice (e.g., Rao,
Greve, and Davis, 2001; Pollock and Rindova,
2003). Thus, the financial press’s effects are not
limited to just providing information relevant to
investment decisions, but also by influencing the
frameworks and criteria used to make those invest-
ment decisions.
The Business Week stories are agenda setting (or
agenda reinforcing) in that they rely on specific
indicators of board effectiveness, defined as ‘a
set of guidelines,’ or ‘best practices,’ commonly
articulated by governance experts’ (Byrne, Grover,
and Melcher, 1997: 98)—in spite of a lack of
compelling evidence for many of the included
indicators in empirical research (e.g., Dalton et al.,
1998, 1999; Westphal, 1999). By evaluating boards
against these criteria and publishing the results,
the articles serve to reinforce the salience and
importance of those board attributes and practices.
Furthermore, in a direct appeal to social proof, the
articles defined governance experts—managers of
the largest money-management firms and pension
Strat. Mgmt. J., 26: 461–471 (2005)

funds, and other unspecified academics, attorneys,
and activists—and then surveyed the population
for their opinions on the best and worst boards
of directors. Finally, in addition to listing the
results of the board analysis and expert surveys,
the authors selectively include specific companies
and practices in the text of the article, interspersed
with quotes from a variety of governance experts,
in building their case.
On both perspectives, we expected that the
firms’ whose boards were identified as best would
enjoy abnormal positive stock returns, and vice
versa. In the information brokering role, the arti-
cles present a great deal of information which,
according to the predominant theories of corpo-
rate governance, should be of interest to rational
investors. The listed firms represent the zenith
and nadir of boards’ shareholder accountability,
director quality, and independence of management
influence according to the criteria employed by
Business Week and its panel of experts, and to the
extent that those are important in ensuring returns
to investors, they should be reflected in share-
holder wealth. As for the social constructivist view,
the authors propagate the legitimacy (Pollock and
Rindova, 2003) of both the criteria used to evaluate
boards as well as the firms to which the crite-
ria are applied. The Business Week articles make
no bones about the conclusions drawn from their
analyses—‘best’ and ‘worst’ are extreme labels in
terms of legitimacy. If the articles are successful
in influencing investors of the legitimacy or ille-
gitimacy of the listed boards, that should also be
reflected in stock prices. Thus:
Hypothesis 1a: The publication of favorable
board of director ratings in Business Week will
result in positive abnormal returns to stockhold-
ers of the associated corporations.
Hypothesis 1b: The publication of unfavorable
board of director ratings will result in negative
abnormal returns to stockholders of the associ-
ated corporations.
On both the information brokering and legitimacy
views, we would expect the more influential ele-
ments of the Business Week analysis to be the
results of the expert surveys. The efficient market
hypothesis holds that information is incorporated
in stock prices as soon as it is presented, with rel-
atively brief moves to new equilibrium states. The
Copyright  2005 John Wiley & Sons, Ltd.
Financial Press and Stockholder Wealth 463
only information in the articles that was not previ-
ously available to the public was from the raters’
subjective evaluations. Furthermore, expert opin-
ions are more likely than publicly available board
data to provide the social proof required to change
investors’ perception of board legitimacy.
Hypothesis 2: The expert rating data presented
in the Business Week articles will explain more
variance in abnormal returns than the board
attribute data.
METHODS
Sample and data collection
The 1996 and 1997 Business Week cover stories
(Byrne and Melcher, 1996; Byrne et al., 1997)
contained results from surveys and analyses the
magazine had commissioned from Lou Harris
& Associates. These rankings were based on
two classes of measures, ratings from a ‘Board
Performance Poll’ that was sent to a wide range
of governance experts as defined by Business
Week, and a ‘Governance Guideline Analysis’ that
used aggregated data from publicly available data
sources. The survey and governance guideline
scores were combined into an overall rating of the
board, from which were derived ordered rankings
of 25 ‘best’ and 25 ‘worst’ boards of directors in
the United States for each year (Table 1). Sixteen
of the boards listed as most effective in 1996 were
also listed in 1997, and 14 ineffective boards in
1996 were also in the 1997 ineffective list.
Subjective expert ratings were derived from
data collected in board performance surveys
sent to managers of large money-management
firms and pension funds, along with legal
and academic governance experts. Respondents
consisted primarily of professional investors who
managed portfolios worth $1.6 trillion in 1996,
and $2 trillion in 1997. The raters were asked
to identify the public corporations whose boards
they considered to be most and least effective, and
were then asked to grade the boards on a scale
of 0 (poor) to 10 (excellent) for four categories:
accountability to shareholders, quality of directors,
independence, and corporate performance. The
scores were then aggregated into an overall Survey
Score.
Strat. Mgmt. J., 26: 461–471 (2005)
464 J. L. Johnson et al.

Table 1. Boards of directors rated by Business Week in 1996 and 1997

‘Best’ boards of 1996 1996 1997 1997 ‘Worst’ boards of 1996 1996 1997 1997
directors ranka abnormal ranka abnormal directors ranka abnormal ranka abnormal
returnsb returnsb returnsb returnsb

AMR 21 0.067 AT & T −20 −0.009 −24 0.025

Abbott Labs 18 0.003 Advanced Micro Devices −8 0.029 −13 −0.003
BankAmerica 18 0.078 Apple Computer −2 −0.020 −3 −0.104
Campbell Soup 1 0.001 1 0.014 Archer Daniels Midland −25 0.033 −22 −0.014
Caterpillar 22 −0.011 Bausch & Lomb −3 0.011
Ceridian 11 −0.037 H & R Block −5 0.007
Chrysler 6 0.013 6 0.038 Browning Ferris Industries −14 0.038
Citicorp 14 0.028 Champion International −24 0.014 −4 −0.007
Coca Cola 20 −0.007 15 0.059 Columbia HCA −15 0.044
Colgate Palmolive 5 0.010 9 0.060 Digital Equipment −5 −0.066
Compaq Computer 4 0.046 3 0.054 Dillard’s −20 0.029
Dayton Hudson 17 0.090 Walt Disney −12 0.008 −25 0.008
Eastman Kodak 15 0.017 Dow Jones −21 0.018
Exxon 10 0.021 23 0.028 Ethyl −17 0.018
General Electric 2 −0.019 2 −0.006 Fleming Companies −16 −0.001 −9 0.008
General Mills 13 0.038 WR Grace −10
General Motors 13 −0.016 7 0.005 HJ Heinz −23 0.001 −23 0.102
Hercules 9 0.004 Humana −1 −0.036
Hewlett Packard 17 0.068 11 0.044 ITT −12 0.020
Home Depot 25 −0.018 K Mart −19 0.164 −8 −0.007
IBM 3 0.009 5 0.020 Maxxam −16 0.017
Intel 12 0.122 8 0.014 Morrison Knudsen −6 0.026
Johnson & Johnson 7 0.018 12 0.031 NationsBank −21 0.041
Mallinckrodt 21 0.027 Occidental Petroleum −18 0.008
Merck 8 0.005 20 0.046 Ogden −9 0.038 −17 0.022
Microsoft 16 0.042 4 0.023 Quaker Oats −7 0.008
Pfizer 19 0.072 RJR Nabisco −11 0.003 −2 0.041
Philip Morris 19 −0.009 Rollins −22 −0.002 −19 0.000
Procter & Gamble 24 0.050 Shoneys −1 −0.043
Sears Roebuck 23 0.001 25 0.053 Texaco −6 −0.005
Sun Microsystems 14 0.113 Time Warner −4 0.034 −11 0.022
Sunbeam 22 0.012 Topps Company −14 0.006
Texas Instruments 10 −0.050 Unisys −18 0.005
Travelers 24 0.012 16 0.114 Warnaco −15 0.036
Waste Management −10 0.019
Westinghouse Electric −13 −0.029 −7 0.011

a
Rankings are in descending order from best to worst. −25 is the worst possible ranking.
b
Abnormal returns are cumulative for the 3-day event window.

The objective ratings were created from indi-
cators of ‘best practices’ articulated by a group
of governance experts. The investigators created
three objective measures designed to correspond
with three of the survey categories: Independence
(two or more inside directors; insiders on audit,
nominating or compensation committees; outside
directors with consulting or legal contracts with the
company; board interlocks); Board Quality (direc-
tors’ total board memberships; at least one out-
sider with experience in the firm’s core business;
at least one CEO of a firm of similar stature);
Copyright  2005 John Wiley & Sons, Ltd.
and Accountability to Shareholders (director stock
ownership; no director pension plan; unclassified
board). Objective scores were combined into a
summary Governance Guideline Score. Because
information necessary to decompose the Gover-
nance Guideline Scores into their constituent parts
was not made available in the articles, we col-
lected information regarding all directors’ insider
status, tenure, and total number of boards to assess
the explanatory power of the underlying publicly
available data. All information was gathered from
the listed firms’ proxy statements.
Strat. Mgmt. J., 26: 461–471 (2005)

Analysis
We relied on the market model event study method
(e.g., Brown and Warner, 1985; McWilliams and
Siegel, 1997; Peterson, 1989) to assess price reac-
tions to the information reported in the Busi-
ness Week cover stories. McWilliams and Siegel
(1997) caution that the associated event win-
dow—the period in which the event is hypothe-
sized to influence stock prices—not extend beyond
a few days to reduce the chance of capitalizing on
abnormal returns associated with unrelated events.
Thus, we examined the statistical significance of
abnormal returns on a daily basis as well as cumu-
lating them over a 3-day event period to allow
for the distribution of the magazines. The pre-
cise distribution date was determined by contact-
ing Business Week, which as a matter of policy
embargoes all magazines until 5 : 15 p.m. on the
Thursday 2 weeks prior to the printed issue date,
at which time they begin distribution. The issues in
this study were put into the mail stream November
14, 1996 and November 28, 1997 (a Friday since
Thursday, November 27, 1997 was a holiday), and
would begin appearing in most mailboxes and on
newsstands November 15, 1996 and December 1,
1997. The triggering event is the first trading day
following shipment of the magazines (November
15, 1996 and December 1, 1997), and the event
window extended through 3 trading days (Novem-
ber 19, 1996 and December 3, 1997). For purposes
of comparison, we also report abnormal returns
and tests of significant abnormal returns for several
days on either side of the event window.
Complete data were available for 50 of the
‘best’ and 49 of the ‘worst’ listings included in
the two Business Week reports. Rankings of the
firms included in each year’s report, along with
abnormal returns for each firm, are included in
Table 1. Security prices were collected from the
CRSP tapes. The CRSP equally weighted market
index was used in regression equations to represent
the market return for each day in the estimation and
event periods.
We removed potentially confounding cases
that could significantly affect stock prices by
searching the Wall Street Journal (McWilliams
and Siegel, 1997). Specifically, stock returns
for firms on which stories were published
that would potentially affect the firms’ stock
price (e.g., reports of unexpected earnings or
revenues, dividend announcements, stock offerings
and buybacks, debt issuances, reorganizations,
Copyright  2005 John Wiley & Sons, Ltd.
Financial Press and Stockholder Wealth 465
acquisitions or significant alliances, CEO turnover,
significant product price increases, major product
innovations, or recalls) were deleted from the data
set for the day the article was published as well
as the prior day and subsequent day. In all, 344 of
the 1584 observations for the period 5 days before
and 10 days following the triggering event were
deleted from the sample. Sample sizes for each
day in each of the different analyses are reported
in Table 2.
We corroborated the findings with a nonpara-
metric test of abnormal returns by examining the
statistical significance of the relative proportions of
positive to negative abnormal returns for each day
(McWilliams and Siegel, 1997). In the presence
of systematic abnormal returns, one would expect
the overall proportions of firms with positive and
negative returns to be different.
Regression
To test Hypothesis 2, hierarchical linear regres-
sions were run to evaluate the variance explained
in the standard cumulative abnormal returns from
the 3-day event window. Standardized cumulative
abnormal returns were regressed on two blocks
of independent variables. The first block con-
tained the independence, quality, and accountabil-
ity scores reported in the articles, which were
derived from the publicly available data. The sec-
ond block contained the ratings from the expert
poll. In another hierarchical regression, we exam-
ined if the Business Week objective scores of inde-
pendence, quality, and accountability explained
additional variance over that explained by their
constituent variables (percentage insiders, average
director stock ownership, and average board mem-
bership) which are frequently used in governance
research. Conclusions were evaluated on the basis
of the significance of change in explained variance,
as well as the statistical significance of individual
path values.
RESULTS
Individual abnormal returns for the 3 days in
the event window for the sample of all ‘best’
firms are shown in Table 2. For comparison
purposes, abnormal returns for the days leading
up to and following the event window are
also included. Figure 1 also shows cumulative
Strat. Mgmt. J., 26: 461–471 (2005)
466 J. L. Johnson et al.
Table 2. Abnormal returns for firms with ‘best’ and ‘worst’ boards of directors

Day ‘Best’ boardsa ‘Worst’ boardsb

Abnormal Standardized t-value N Abnormal Standardized t-value N
returns abnormal returns returns abnormal returns

−6 0.006 0.272 1.633 36 0.002 0.168 0.991 35

−5 0.000 0.042 0.266 40 −0.001 0.040 0.251 40
−4 0.003 0.178 1.113 39 0.002 0.090 0.585 42
−3 0.004 0.204 1.288 40 0.000 0.121 0.791 43
−2 −0.001 −0.100 −0.630 40 0.003 0.093 0.598 41
−1 0.000 0.020 0.127 41 0.002 0.045 0.294 43


0 0.015∗∗∗ 0.777 5.035 42 0.005∗ 0.336 2.230 44
Event perioda 1 0.003 0.247 1.579 41 0.002 0.217 1.387 41
2 0.010∗∗∗ 0.548 3.420 39 0.003 0.103 0.635 38
3 −0.003 −0.200 −1.181 35 −0.006 −0.298 −1.789 36
4 0.002 0.129 0.774 36 0.007 0.281 1.777 40
5 −0.004 −0.234 −1.365 34 0.000 −0.072 −0.429 36
6 0.002 0.282 1.716 37 −0.002 0.040 0.245 38
7 0.004 0.226 1.338 35 −0.001 0.013 0.078 35
8 0.000 0.052 0.314 37 0.001 0.076 0.464 37
9 −0.001 −0.079 −0.497 40 0.001 0.065 0.402 38

∗
p < 0.05; ∗∗ p < 0.01; ∗∗∗ p < 0.001
a
Average standardized cumulative abnormal returns for the 3-day event period = 0.876∗∗∗ (t = 6.00). Days outside the event window
are presented only for comparison purposes. Analyses were conducted on a sample of only nonredundant firms, with no substantive
changes in findings. Full results are available from the authors upon request.
b
Average standardized cumulative abnormal returns for the 3-day event period = 0.382∗ (t = 2.59). Days outside the event window
are presented only for comparison purposes. Analyses were conducted on a sample of only nonredundant firms. While the cumulative
abnormal returns for the 3-day event window remained statistically significant, no single day’s returns were statistically significant.
Full results are available from the authors upon request.

abnormal returns for a 16-day period surrounding
the triggering event. The average abnormal returns
and t-values listed in Table 2 columns provide
information about returns for each of the event
days as well as the event window. Cumulative
abnormal returns for this sample are significant
(p < 0.001). Abnormal returns for the first and
third days following the release of the magazines
are significantly greater than zero at p ≤ 0.001.
Average cumulative abnormal returns—which
assess the returns over the entire 3-day event
window—are also significantly greater than zero
(p < 0.0001). None of the days leading up to or
following the event window showed significant
abnormal returns. Results for a nonredundant
sample did not significantly change the results.
Thus, Hypothesis 1, that investors will bid up the
stock of firms whose boards are highly rated, was
strongly supported.
Our hypothesis that critical reports would result
in decreased stock prices was not supported, and
in fact the result was opposite from predicted.
Cumulative abnormal returns for both samples
Copyright  2005 John Wiley & Sons, Ltd.
were positive for the event period (p < 0.05),
and the first day’s returns were significantly
different from zero. Thus, in contradiction to
Hypothesis 2, it appears that the negative
ratings in Business Week had a salutary effect
on a firm’s stock price. Figure 1 shows that
cumulative abnormal returns for the sample
of negatively rated firms increased during the
event window (1.1%), but considerably less
than the returns for the positively rated firms
(2.9%).
Results of the binomial z-tests are reported in
Table 3, which include z-tests for equal numbers of
positive and negative abnormal returns for each of
the days in the analysis. Examination of the table
shows that the sample including all best boards is
unproblematic. The 2 days in the event period for
which there were statistically significant abnormal
returns have a disproportionate number of firms
with positive abnormal returns (71% of the firms
on day one and 72% on day three had significant
abnormal positive returns). Thus, outliers do not
account for the significant abnormal returns on the
Strat. Mgmt. J., 26: 461–471 (2005)
 Financial Press and Stockholder Wealth 467

Figure 1. Cumulative abnormal returns for firms with ‘best’ and ‘worst’ boards

Table 3. Binomial tests of proportion of negative abnormal returns for firms with ‘Best’ and ‘Worst’ boards

Day ‘Best’ boards ‘Worst’ boards

N Number Proportion Significance N Number Proportion Significance
negative negative negative negative

−6 36 13 0.36 0.134 35 17 0.49 1.000

−5 40 21 0.53 0.874 40 25 0.63 0.155
−4 39 17 0.44 0.522 42 16 0.38 0.165
−3 40 24 0.60 0.268 43 20 0.47 0.760
−2 40 17 0.43 0.429 41 18 0.44 0.532
−1 41 24 0.59 0.349 43 27 0.63 0.127


0 42 12 0.29∗∗ 0.009 44 12 0.27∗∗ 0.004
Event perioda 1 41 18 0.44 0.532 41 13 0.32∗ 0.029
2 39 11 0.28∗∗ 0.010 38 18 0.47 0.871
3 35 24 0.69∗ 0.043 36 21 0.58 0.405
4 36 16 0.44 0.617 40 18 0.45 0.635
5 34 22 0.65 0.123 36 20 0.56 0.617
6 37 22 0.59 0.324 38 19 0.50 1.000
7 35 15 0.43 0.499 35 21 0.60 0.310
8 37 19 0.51 1.000 37 17 0.46 0.742
9 40 22 0.55 0.635 38 24 0.63 0.144

a
Days outside the event window are presented only for comparison purposes. ∗ p < 0.05; ∗∗
p < 0.01; ∗∗∗
p < 0.001

first and third days. Negative-to-positive returns proportions. The first and second days were signif-
are more nearly equal for the ‘worst’ boards sam- icantly different from a 50 percent split of positive
ples, but still show two significant differences in to negative abnormal returns, indicating again that
Copyright  2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 461–471 (2005)
 468
J. L. Johnson et al.

Copyright  2005 John Wiley & Sons, Ltd.

Table 4. Means, standard deviations, and interitem correlations

Mean S.D. 1 2 3 4 5 6 7 8 9 10 11

1. SCAR 0.631 0.966

2. Mean Survey Score 5.633 3.005 0.25∗
3. Survey Shareholder Accountability 5.629 3.208 0.29∗∗ 0.99∗∗
4. Survey Board Quality 5.795 2.928 0.25∗ 0.99∗∗ 0.98∗∗
5. Survey Independence 5.476 3.019 0.19 0.98∗∗ 0.94∗∗ 0.95∗∗
6. Mean Governance Analysis Score 6.027 1.819 0.07 0.46∗∗ 0.46∗∗ 0.43∗∗ 0.48∗∗
7. Analysis Shareholder Accountability 5.117 3.393 0.20 0.38∗∗ 0.40∗∗ 0.38∗∗ 0.35∗∗ 0.74∗∗
8. Analysis Board Quality 6.212 2.255 −0.03 0.07 0.08 0.03 0.08 0.45∗∗ −0.01
9. Analysis Independence 6.753 2.806 −0.07 0.38∗∗ 0.34∗∗ 0.35∗∗ 0.45∗∗ 0.69∗∗ 0.24∗ 0.08
10. Percentage Insiders 0.226 0.108 0.01 −0.31∗∗ −0.28∗∗ −0.30∗∗ −0.34∗∗ −0.19 −0.07 0.04 −0.32∗∗
11. Average Board Membership 3.908 1.121 0.05 0.10 0.10 0.09 0.12 −0.01 0.10 −0.36∗∗ 0.15 −0.26∗
12. Average Stock Ownership 0.007 0.021 −0.10 −0.27∗∗ −0.25∗ −0.26∗ −0.31∗∗ −0.16 0.02 −0.04 −0.33∗∗ 0.05 −0.05

∗ ∗∗
p < 0.05; p < 0.01

Strat. Mgmt. J., 26: 461–471 (2005)

 Financial Press and Stockholder Wealth 469

outliers do not account for the significant abnormal
returns observed in the first day of the event period
on the full sample.
Intercorrelations, means, and standard deviations
for items used in the regression analysis are
presented in Table 4. In initial tests, the component
indicators of the Business Week objective measures
failed to account for additional variance in
standard cumulative abnormal returns, nor did
they explain as much variance as the former
variables. For that reason, only the Business
Week subjective variables were used in subsequent
regressions. To correct for the multicollinearity
present among the expert ratings variables (0.94 ≤
r ≤ 0.98), we used the mean of the variables
as an overall subjective rating of the board.
We also reported results from a regression that
included the shareholder accountability rating as
the expert rating, as it had the strongest zero-
order correlation of any of the expert ratings.
As shown in Table 5, in the first block of
variables, the objective measure of shareholder
accountability (f [minimum of $100,000 stock
ownership, no pension benefits for directors, board
not classified]) was significant at p < 0.05, but
the overall model failed to explain significant
variance. In both subsequent models, the objective
accountability path became insignificant with
the introduction of the mean survey score and
shareholder accountability, each of which was
statistically significant. Moreover, Models 2 and
3 resulted in significant improvement in variance
explained, providing support for the efficacy of the
Business Week articles’ effect on the reputation of
boards of directors.
DISCUSSION
The results support the overall conclusion that the
publication of Business Week ’s evaluative stories
on corporate boards affected investor behavior.
The statistical significance for both groups held
even when discarding already listed firms in
the second year and in nonparametric tests of
significant abnormal returns. Moreover, over the
full period examined, the most dramatic changes
in stock price occurred in the days immediately
following the release of the articles. In short,
investors of companies that were included in
Business Week articles enjoyed positive abnormal
returns following the publication of those stories,
especially for those firms in the ‘best’ list.
Moreover, the variance in abnormal returns was
explained by the information contained in the
expert surveys.
While this constitutes solid evidence for
the efficacy of financial press publications’
influence on corporate governance, the findings
only partially support the hypotheses. The
anomalous finding—that being included in the
negative reports results in positive abnormal
returns—constitutes a clear challenge for both
perspectives. Before addressing those implications,

Table 5. Regressions of standardized cumulative abnormal returns on Business Week’s ‘governance guideline analysis’
scores and expert ratings scores

Independent variables Model 1 Model 2 Model 3

Intercept 0.641 0.477 0.477

(0.383)a (0.379) (0.373)
Governance Guideline Analysis Shareholder Accountability 0.065∗ 0.040 0.034
(0.030) (0.031) (0.031)
Board Quality −0.009 −0.011 −0.014
(0.046) (0.044) (0.044)
Board Independence −0.043 −0.071 −0.070
(0.037) (0.038) (0.036)
Expert ratings Mean of Survey Scores 0.088∗
(0.037)
Survey Shareholder Accountability 0.094∗∗
(0.034)
Model R 2 0.054 0.112∗b 0.131∗∗

∗
p < 0.05; ∗∗ p < 0.01
a
Standard errors in parentheses.
b
Asterisks represent significance tests of change in R 2 .

Copyright  2005 John Wiley & Sons, Ltd. Strat. Mgmt. J., 26: 461–471 (2005)
470 J. L. Johnson et al.
it bears reviewing the implications from the
corroborated hypotheses.
First is the demonstration that reporting on
corporate governance can affect shareholder
wealth. The articles from this study were complex,
presenting objective and subjective information
from eclectic sources on not only the boards of
specific firms, but also taking an active role in the
interpretation of that information, and it appears
that the information and interpretation resulted in
a re-evaluation of the firms. That the expert ratings
accounted for the observed variance in abnormal
returns is consistent with both the information
brokering and legitimacy accounts. According to
the efficient market thesis, information is factored
into market valuations almost instantaneously,
and the expert ratings were the only information
reported in the Business Week articles that was not
previously publicly available. Moreover, experts
play an especially important role in the legitimacy
perspective, providing social proof for knowledge
claims which may actually contain a great deal of
uncertainty.
Explanations for the unexpected findings are
necessarily ad hoc, but warrant examination. The
first possibility is that the significance was only
a function of chance. As Figure 3 shows, the
abnormal returns for the negatively rated firms
were considerably lower than for the positive
firms, and significance was only at α = 0.05.
In addressing this possibility, we took care to
control for confounding events and alternative
explanations (e.g., outliers), and in each case
statistical significance was preserved, which led us
to look at additional possibilities.
The modest stock price increases may reflect
a mere publicity effect. There is some empirical
evidence for market reactions to the publication
of financial stories containing vacuous information
(e.g., Liang, 1999). There may even be some
legitimacy benefits from simply being mentioned
in the financial press (e.g., Zuckerman, 1999).
Pollock and Rindova (2003), for example, reported
increases in IPO values associated with press
coverage, more so even than the tenor of the
coverage.
Finally, it is possible that the unexpected
abnormal returns may reflect a rational reaction
from contrarian investors. The Business Week
stories manifestly label the ‘worst’ boards of
directors of all publicly traded firms in the United
States, an outright declaration of illegitimacy.
Copyright  2005 John Wiley & Sons, Ltd.
Such a declaration—on the cover of a widely
read business newsweekly, and supported by a
large panel of corporate governance experts—may
constitute sufficient social proof to motivate
even an intransigent board to reform itself.
Indeed, that ‘worst’ boards were more likely
than ‘best’ boards to turn over two or more
directors (chi-square = 5.86, p = 0.014) and the
CEO (chi-square = 5.86, p = 0.014) lends some
credence to the ‘governance by embarrassment’
(Byrne and Melcher, 1996: 82) explanation. Of
course, each of the alternative explanations may
have contributed to the observed unexpected
findings.
Apparent anomalies notwithstanding, this study
contributes to the emerging corpus on the role of
the financial press in affecting financial markets.
The results suggest that the financial press may
influence investor behavior and that corporate
governance may be one criterion by which
investors critically evaluate the firms in which
they invest. We have argued that the business
press may affect shareholder behavior not only
by providing information about specific firms’
boards of directors, but also by shaping investors’
interpretations of what constitutes legitimate
corporate governance. In keeping with this view,
we found that the press is most influential when
assuming an active role in the collection and
presentation of information. We believe that our
study sheds important light on the association
between the financial press and the investment
community and we hope our study will encourage
other researchers to proceed down this path.
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