Is Management Quality Value Relevant?

Using a unique database of management quality ratings over a 17 year period, we find that while good management appears to be associated with lower subsequent market returns, this is entirely consistent with an informationally efficient market. Quality of management is value relevant in that better managed firms have lower cost of equity, more stable earnings, higher profitability that persists over time, and higher market valuations using the Ohlson (1995 and 2001) method. Potentially endogenous relationships are unlikely to be driving our results. While well managed firms are ‘good firms’, contrary to the belief of many market participants their stocks perform no better than those of poorly managed firms.