Companies benefit by accepting blame for poor performance

ANN ARBOR—Firms that take responsibility for poor business performance in their corporate annual reports have higher stock prices one year later, says a University of Michigan Business School researcher.

"Shareholders have more favorable impressions of companies if their managers accept blame for negative performance," said Fiona Lee, associate professor of management and organizations at the Michigan Business School and associate professor of psychology. "Claiming personal responsibility for negative events makes the organization appear more in control."

In a study forthcoming in the Personality and Social Psychology Bulletin, Lee and colleagues Christopher Peterson, a U-M psychology professor, and Larissa Tiedens, associate professor of organizational behavior at Stanford University, examined how companies’ explanations for their performance affect stock prices.

They analyzed 21 years’ worth of "Letters to the Shareholders" in annual reports for 14 companies in three industries: pharmaceuticals, food and beverages, and industrial equipment.

Their results show that companies that made seemingly "self dis-serving" explanations by blaming poor performance internally—such as on managers’ poor decisions—had higher stock prices one year later. By hypothetically picking stocks based on how managers explained negative performance (self-blaming vs. other-blaming), the researchers found the stocks of the five most self-blaming companies yielded an adjusted return of 14 percent to 19 percent more than the stocks of the five most other-blaming companies.

"We found that, like individuals, organizations were self-serving by attributing negative events—such as poor performance—externally rather than internally," Lee said. "However, such attributions did not positively predict future outcomes.

"Organizations that claimed that negative events were caused by external and uncontrollable factors—such as a sluggish economy—had lower future stock prices, while organizations that claimed personal accountability for negative events, rather than blamed others, had better future outcomes."