The Financial Information Content of Perceived Quality

Abstract

The authors investigate whether movement in a firm's stock price, that is, a measure of firm value, is associated with information contained in perceived quality measures. In a model that also allows for the effect of economywide factors and a firm's return on investment, they find a positive relationship between stock return and changes in quality perceptions. These results imply that the quality measure contains information, incremental to that reflected by current-term accounting measures, about future-term business performance. They suggest that managers should convey information to the stock market, such as the brand's quality image, useful in depicting the long-term prospects of the business. By doing so, the stock market will rely less on short-term measures of business performance, and managers will be freer to undertake strategies necessary for ensuring the long-term viability of their firms.