The “Most Admired Knowledge Enterprise” (MAKE) awards, based on opinions gathered from experts using the Delphi method (three or four rounds of the experts anonymously exchanging views), recognizes exemplary organizational knowledge management. Does the market consider this award, directly or indirectly, in valuing publicly traded MAKE award winners? In their September 2013 paper entitled “Capital Markets Valuation and Accounting Performance of Most Admired Knowledge Enterprise (MAKE) Award Winners”, Mark DeFond, Yaniv Konchitchki, Jeff McMullin and Daniel O’Leary examine stock market returns and future operating performance for MAKE award recipients. They consider both short-term returns during the five-day interval around public announcements of MAKE awards and intermediate-term returns after announcements. Using stock and accounting data and analyst earnings forecasts for all U.S. publicly traded MAKE award winners as available during 2001 through 2008 (247 MAKE awards), they find that:
- Stocks of MAKE winners earn an average gross abnormal return of 1.2% during the five-day window from two days before through two days after public announcements (KNOW Network members receive email announcements one or two days before public release). Abnormal returns persist after accounting for other kinds of firm events.
- Stocks of firms winning MAKE awards within the past 12 months generate an average monthly four-factor (market, size, book-to-market, momentum) alpha of 0.9% over the next year. MAKE stocks tend to be high-beta (1.29) growth stocks.
- MAKE winners tend to outperform peers based on accounting measures during the post-award year, and analysts on average make significantly larger upward earnings forecast revisions for MAKE winners than for peers during the months after awards.
- However, the positive short-term abnormal return occurs only during the second half of the sample period, while the intermediate-term positive alpha occurs only during the first half. These results suggest that the market begins paying attention to MAKE awards several years after their inception.
In summary, evidence indicates that MAKE awards predict future operating perform and positive average abnormal stock returns (of dubious exploitability for most investors).
Cautions regarding findings include:
- Reported returns are gross, not net. Including the costs of trading on MAKE award announcements would reduce these returns.
- As stated in the paper, about half the the five-day window used to estimate abnormal stock returns around MAKE award announcements is available only to a select group. The paper does not address short-term abnormal returns strictly after public announcement.
- As noted in the paper, the positive intermediate-term alpha for stocks of MAKE winners disappears in the second half of the sample period.
