Long-Run Stock Returns Following Briloff's Analyses

Abraham Briloff is well known for more than four decades of insightful analysis and criticism of the accounting practices of various companies. His critiques, in the form of articles published in Barron's, consist of detailed financial analyses of the questionable accounting practices of the companies he examines. Previous research has shown that the companies criticized by Briloff in Barron's experience significant negative abnormal returns around the article's publication date. To understand the valuation effect associated with his financial analyses, this article examines long-run abnormal returns following the publication date. In addition to the initial negative reaction on publication of the articles, the companies in the sample experienced further significant risk-adjusted returns for one and two years of, respectively, −15.51 percent and −22.88 percent. The results show that a decline in future operating performance appears to be an important reason for the poor stock market performance of the companies. Thus, Briloff could apparently foresee the coming decline in operating performance better than the market could. These results underscore the importance of understanding a company's accounting and of the role of careful financial statement analysis. Abraham Briloff is a well-known financial analyst and accounting scholar who has since the 1960s published several insightful articles in Barron's analyzing and criticizing the financial statements of individual companies. We studied the performance of these companies before and after Briloff's critiques. Previous research has shown that, on average, the companies criticized by Briloff experience statistically significant abnormal returns of −8.6 percent around the time of publication of his article. We examined abnormal returns for a longer period—three years following article publication. We found that the common stocks of the companies analyzed and criticized by Briloff continue to perform negatively for a period of two years following publication of the articles. The two-year buy-and-hold abnormal returns of approximately −23 percent following the month of publication are statistically significant. If the initial announcement period (Month 0 in our study) is included, the overall effect of Briloff's articles on the stock prices of the companies is approximately −33 percent. To understand the connection between stock market performance and the companies' performance, we also examined return on assets of the companies following the publication of the Briloff articles. A decline in operating performance would be consistent with the hypothesis that Briloff is able to foresee a decline in operating performance through an analysis of financial statements. Our results show a significant decline in operating performance following the publication of Briloff's articles. Thus, the operating performance results are consistent with the stock market results. The results we report strongly suggest that a careful analysis of companies' published financial statements can help an analyst or investor identify mispriced stocks. Thus, this study underscores the importance of fundamental analysis in valuation. After reading all of Briloff's articles, we attempted to develop a pattern in his criticism, but we could not. He has been critical of a wide range of practices used by companies to inflate their performance. Examples include accounting for mergers, leases, restructuring charges, gain or loss on sales of assets, and accounting for in-process research and development. In general, Briloff is apparently able to spot several potential abuses of accounting by companies—even large companies. A mechanical model that would imitate Briloff is unlikely—there does not appear to be a shortcut to careful financial statement analysis—but financial analysis, while time consuming, can be rewarding.