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Baldrige Award Announcement andLong Memory in Shareholder WealthJeremy Eng Tuck Cheah aa University of Nottingham Malaysia Campus , Jalan Broga,MalaysiaPublished online: 21 Feb 2007.

To cite this article: Jeremy Eng Tuck Cheah (2007) Baldrige Award Announcement and Long Memoryin Shareholder Wealth, Total Quality Management & Business Excellence, 18:1-2, 209-218, DOI:10.1080/14783360601053517

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Baldrige Award Announcement andLong Memory in Shareholder Wealth

JEREMY ENG TUCK CHEAH

University of Nottingham Malaysia Campus, Jalan Broga, Malaysia

ABSTRACT In a competitive global market environment, the successful institution and implementa-tion of a comprehensive quality improvement programme is pivotal in attaining and sustainingbusiness excellence. Tangible evidence of a company’s level of excellence can be demonstrated bywinning a prestigious quality award like the Malcolm Baldrige National Quality Award (MBNQA).While the intention to raise the level of competitiveness in all business sectors is lauded, twopertinent issues arise. Firstly, do investors or stock market participants share the belief that qualityleads to business excellence. This implies that the stock market participants may have limitedknowledge and experience in assessing the impact of quality improvement initiatives on performance(Easton & Jarrell, 1998). Secondly, if investors do believe and are able to assess the benefits qualityimprovement initiatives bring, would they acknowledge the benefits these quality awards bring interms of sustained returns? This paper, an extension from studies by Przasnyski & Tai (2002) andRamasesh (1998), attempts to investigate the long run sustainability of returns by recipientcompanies of the MBNQA from 1988 to 1996. Using long memory models commonly used in thefinancial econometrics literature, it was found that most recipient companies do not display longmemory or, in short, recipient companies cannot sustain the previously generated significantabnormal returns on the day of announcement of winning the award.

Introduction

In the face of globalization, a prerequisite for any company to succeed is to institute and

implement an effective and comprehensive quality improvement programme. It is not only

a sufficient condition to fill orders but also a necessary condition to win orders. From the

outset, it was envisaged that the awareness for the need for continuous improvement in

quality among companies would increase with the introduction of prestigious awards

such as the Malcolm Baldrige National Quality Award (MBNQA) and the Deming

Prize. Since its inception in 1988 and the announcement of the first recipient in 1989,

MBNQA was created in an effort to boost the overall competitiveness of most US com-

panies (Hodgetts et al., 1999). Judging from the enormous resources and energies spent

Total Quality Management

Vol. 18, Nos. 1–2, 209–218, January–March 2007

Correspondence Address: Jeremy Eng Tuck Cheah, Nottingham University Business School, University of

Nottingham Malaysia Campus, Faculty of Social Sciences and Education, Jalan Broga, 43500 Semenyih Selangor

Darul Ehsan, Malaysia. Email: cheah_eng.tuck@nottingham.edu.my

1478-3363 Print=1478-3371 Online=07=1–20209–10 # 2007 Taylor & FrancisDOI: 10.1080=14783360601053517

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in attempting to win these awards, they are also seen as a form of recognition for the efforts

by the companies as well as reflecting their belief that quality leads to business excellence.

Voluminous books and articles have been written about the MBNQA since its inception

and many companies have, either adopted, or made variations to the Award’s core values

and concepts as well as its accompanying extensive scoring guidelines. However, there are

two major issues to address. First, if investors or stock market participants are capable of

assessing the impact of quality improvement programmes on the performance of com-

panies, would they believe that quality leads to business excellence in terms of financial

returns? Even if they do believe that it does, would they acknowledge the benefits that

these quality awards bring in terms of sustained significant abnormal returns?

Apparently, there are two schools of thought surrounding the issue of whether winning

prestigious quality awards lead to improved performance and, eventually, business excel-

lence. Despite the fact that proponents of the awards argue that MBNQA was never meant

to be an indicator of financial success, it should not undermine the important role that the

award plays in promoting quality at the national arena (Stratton, 1993). Since winning

MBNQA cannot guarantee superior financial returns, opponents from the other school

argued that the pursuit of the MBNQA leads not only to additional cost and wastage

but also to a loss of strategic focus of the companies involved.

Even though there are extensive studies documenting the non-financial benefits of well

designed and executed quality improvement programmes, little has been published on the

financial rewards (Wilson et al., 2003). Consider the following dividend discount model

commonly used in the corporate finance literature as one of the methods for valuing the

underlying stock price to illustrate the financial benefits aspect:

Pt ¼X1t¼1

E DtþpjVt

� �1þ rtþp

(1)

where Pt is the intrinsic value of the stock price at time t, E(jVt) represents the mathe-

matical expectation operator conditional upon the available information set during time

t while Dtþp is the amount of dividend paid at time tþ p and rtþp is the stochastic discount

rate for cash flows that occur at time tþ p. It is contended that this model would predict a

change in the fundamental price of the stock if economic information pertaining to the

company influences the expected future stream of dividends or the discount rate or both.

If stock analysts are convinced that a positive difference in the change in the perception

of quality can increase the expected future cash flows (dividends) and/or lower the dis-

count rates conditional to the information set available at time t, Vt, which incorporates

all publicly available information investors would have on the company and its economic

environment, the unanticipated news of winning MBNQA, previously unknown to the

investors should almost instantaneously bring about a change in the stock price of the

company, given that the stock price is efficient.

This paper attempts to study the long run sustainability of the return and the behaviour

of stock market participants of recipient companies after these companies have won the

prestigious MBNQA. This analysis is an extension from two previous papers, one by

Ramasesh (1998) and the other by Przasnyski & Tai (2002). Using long memory

models in representing the persistence characteristics of time series commonly used in

the financial econometrics literature, it was found that all eight recipient companies of

210 J. E. T. Cheah

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the MBNQA taken from the year 1988 until 1998, did not exhibit long memory at 150 and

200 trading days after winning the MBNQA. A direct implication of this could be the fact

that investors do not believe winning the MBNQA will lead to business excellence in

financial terms in the long run and therefore; the statistically significant abnormal

return previously created on the day of announcement is not sustainable. Subsequently,

there is possibly a negative effect on the shareholder wealth and investors who bought

these stocks are advised to dispose of them relatively fast in order to lock in the statistically

significant abnormal return on the day of announcement and to prevent the reversal effect

that takes place soon after that. This paper is different from previous studies on quality in

two significant ways. It seeks to resolve the debate of sustainability of shareholder wealth

after winning the MBNQA by studying the long term impact of the Baldrige Award

announcement on the shareholder wealth. Secondly, by extending from previous

studies, the paper investigates the sustainability of shareholder wealth using long

memory models common in the financial econometrics literature, long after these recipient

companies are awarded with the prestigious MBNQA.

Literature Review

On the first issue of whether investors share the belief that quality initiatives lead to

business excellence measured in financial returns, there are several studies which

attempted to provide possible linkages between quality initiatives and financial returns.

In a study by Docking & Dowen (1999), they suggested that a single ISO 9000 registration

can produce an approximately 0.9% gain in the market value in lesser known firms. As

such, a long sustainable and working quality improvement programme can lead to

better productivity and increased internal and external customer satisfaction, which will

decrease the cost and price of goods and services. This will increase the viability of the

company and command a greater market share. Fisher et al. (2001) found that winners

of the MBNQA showed greater increases in the share prices than the increase in the

Dow Jones Industrial average. Ramasesh (1998) found that the announcement of

the MBNQA recipients is an indicator of the improved future financial performance of

the award-winning companies.

On the other hand, there are some studies arguing that quality is no longer viewed as a

competitive weapon for market entry and acceptance in the last decade and the suggested

positive link between the influences of quality improvement programmes on stock prices is

weakening (Hendricks & Singhal, 1996). Further, they maintain that even though winning a

quality award such as the MBNQA may not exert any impact upon the current price level of

its stock, it can be used as an opportunity to inform its existing customers, to attract new

customers and to reassure customers with negative experiences in the past that it has

improved the quality of the products and services offered. This, in turn, can generate a posi-

tive effect by improving expected future cash flow earnings and by reducing the level of

risk; the latter in turn leading to a favourable stock price reaction.

Adam et al. (1999) believed that winning a quality award may have limited influence on

stock prices because it just does not matter. In their study, they found that some of the

Board of Overseers of the MBNQA indicated that the award may not matter financially

after all. This would imply that winning the award has no implications for either a corpo-

rate recipient’s future cash flow earnings or for its risk-adjusted discount rate. In addition,

Hendricks & Singhal (1996) found that only customers and not award giving organizations

Baldrige Award Announcement and Long Memory in Shareholder Wealth 211

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have the expertise and final say in judging the quality of products and services provided by

the firm. Resources spent on the cause of winning a quality award, when it is in fact a non-

event, may eventually cause a price decline. Sometimes, excessive attention in terms of

marginal cost of resource allocations in implementing a quality improvement programme,

beyond the marginal benefits shareholders may receive from it, may decrease the value of

the shareholders assets (Adam et al., 1999).

Furthermore, arguing from a cultural perspective, Goh et al. (2003) predicted that cul-

tural resistance to increased participation by the company’s employees, customers and

stakeholders in the process of implementing the quality improvement programmes may

not invoke much enthusiasm among stakeholders to justify for statistically significant

abnormal returns in the stock price of the company. They also argued that quality improve-

ment programmes are meant to reduce cost and increase productivity and require a pro-

longed period of time to successfully implement and therefore could not conceivably

have any reaction on stock performance or produce only at best a marginal reaction.

International evidence suggests that recipient companies of national awards do not show

statistically significant abnormal return on the day of announcement of the winners of their

respective awards. For example, Martinez-Costa & Martinez-Lorente (2003) discovered,

after applying parametric and non-parametric tests, no clear evidence to affirm that market

value is positively related to ISO 9000 registration in their a sample of Spanish companies

certified by AENOR. Similarly, Cheah (2005) argued that after adjusting for thin trading

for Malaysian recipient companies of the Prime Minister’s Quality Award, there was no

statistically significant abnormal return on the day of announcement.

As such, it seems that there exists an abundance of literature on quality to suggest that

investing resources, especially financial resources in competing for and winning the

MBNQA is at best a drain on shareholders’ wealth. Apparently, companies such as

Federal Express and General Motors’ Cadillac Division did not fare well in their financial

results after winning the MBNQA (Ramasesh, 1998). Wallace Company, one of the reci-

pients of MBNQA, was laden with $17 million debt one year after winning the MBNQA in

the small business category (Ivey & Carey, 1991). The widely held pessimistic view of the

financial performance among the recipients of the MBNQA among stock market partici-

pants is best captured by Garvin (1991) when he noted that certain Wall Street analysts

actually short the shares of MBNQA recipient companies in anticipation of poor financial

performance subsequent to winning the Award.

In the financial economics literature, Fama (1965) argued that stock prices in an efficient

market would fully reflect all relevant and available information, implying that the stock

market participants have discounted all the benefits that a company would derive from

introducing a working quality improvement programme when the company initiated the

programme and not when the company wins a quality award. This would imply that the

successive one-period stock return or prices are independently distributed. Therefore,

winning a quality award should not create any more value to the stock price subsequently

and, in fact, any stock price reaction during the announcement of the company winning the

award could suggest that the stock market is likely to be inefficient. If the market is ineffi-

cient, these successive one-period stock return or price observations are not independent

and carry a ‘memory’ of all the events that preceded it. This long-term memory theo-

retically lasts forever and is quite unlike the ‘Markovian’ short-term memory. More

recent events have a greater impact than distant events even though the residual influence

is still present (Peters, 1996).

212 J. E. T. Cheah

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Sources of uncertainty in economics and finance are sometimes seen to have similarities

with natural phenomena. According to Lo (1991), studies using long-range dependence

have been popular and extensive in the natural sciences such as hydrology, meteorology

and geophysics. More recently, these techniques and methods have found their way into

the economics and finance literature. The presence of long memory components in

asset returns would invalidate the results of the recent tests of the efficient market hypo-

thesis postulated by Fama (1965). Among the earlier studies are those by Mandelbrot (1971)

and Greene & Fielitz (1977) who have discovered the presence of long-range dependence

and the possibility, and implications, of persistence statistical dependence in asset returns

in the daily returns of many stocks listed in the New York Stock Exchange.

Methodology and Result

The debate or controversy surrounding the issue of whether quality leads to more superior

financial performance against other non-recipient companies is still very active; this paper

takes the position that successful quality initiatives, as evident in winning a prestigious

award, do lead to superior financial performance as reflected in the abnormal returns on

the day of the announcement, as reported by Ramasesh (1998).

Integrated moving average (ARIMA) models are popular among time series experts and

forecasters in studying the intertemporal dynamics of stock prices and forecasting pur-

poses. Originally known as the Box–Jenkins methodology, there is a dearth in the litera-

ture when it comes to measuring the financial benefits of continuous improvement

programmes, let alone modelling long-memory or sustainability of return in the data.

In this paper, recipient companies of the MBNQA were taken from the list provided in

Table 2 in Przasnyski & Tai (2002). A total of 35 recipient companies were awarded the

MBNQA during the period from 1988 to 1998. This list is then checked against the list pro-

vided by Ramasesh to ensure that only publicly traded companies without any other impor-

tant firm-specific announcements (other than winning the MBNQA) on the same day are short

listed. This is to ensure the reliability of the findings in the study. Since this paper takes the

position that abnormal returns earned by these recipient companies are risk-adjusted, only

companies with both Treynor’s and Jensen’s Indices of over-performing the market were

taken. A total of eight companies remained after the filtering process (see Table 1).

A covariance stationary time series that is said to follow an autoregressive fractionally

integrated moving average (ARFIMA) process of order ( p, d, q) may be written using

operator notation if

F(B)(1� B)dXt ¼ Q(B)ut ut � iid (0, s2) (2)

where B is backward-shirt operator, F(B) ; 1 2 f1B 2 . . . 2 fpBp, Q(B) ; 1þ u1Bþ

. . . þ uqBq, and (1 2 B)d is the fractional differencing operator defined as (1 2 B)d ¼Pk¼01 G (k 2 d) B k/ G (2d) G (kþ 1) G (.) being the gamma function.

Recent literature in financial econometrics criticizes the restriction of the value of d to

only integer values (either a 0 or 1) in standard econometric tests of unit root as commonly

found in tests such as the Augmented Dickey–Fuller and Phillips–Perron tests (Diebold &

Rudebusch, 1989a, b; Diebold et al., 1991; Sowell, 1990, 1992). By allowing d to take

fractional values, it generalizes the standard autoregressive moving average (ARIMA)

Baldrige Award Announcement and Long Memory in Shareholder Wealth 213

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Table 1. List of companies from Przasnyski & Tai (2002), Ramasesh (1998) and companies used in this study

Date of

award Winning company (or parent)

Treynor’s

index�Jensen’s

measure�Industry

types��Ramasesh’s (1998)

sample���Inclusion/Exclusion

in this study

14 Nov 1988 Motorola Yes Yes M Yes Included14 Nov 1988 Westinghouse – CNFD – – M Yes Excluded2 Nov 1989 Xerox – BP&S Yes Yes M Yes Included10 Oct 1990 Federal Express Yes Yes S Yes Included10 Oct 1990 General Motors – Cadillac – – – – Excluded10 Oct 1990 IBM Yes Yes – – Excluded9 Oct 1991 Solectron Yes Yes M Yes Included11 Nov 1993 Zytec Yes Yes – – Excluded14 Oct 1992 Texas Instruments – DSEG Yes Yes M Yes Included14 Oct 1992 AT&T – UCS & TSBU – – M/S Yes Excluded24 Apr 1995 RitzCarlton/Marriott Yes Yes – – Excluded14 Dec 1993 Eastman Chemical – – – – Excluded18 Oct 1994 AT&T – CCS – – S Yes Excluded18 Oct 1994 GTE Directories Yes Yes S Yes Included16 Oct 1995 Armstrong – BPO – – M Yes Excluded16 Oct 1995 Corning – TPD Yes Yes M Yes Included16 Oct 1996 ADAC Yes Yes M Yes Included16 Oct 1996 Dana – – S Yes Excluded15 Oct 1997 Xerox Business Systems – – – – Excluded15 Oct 1997 Minnesota Mining and Manufacturing – – – – Excluded15 Oct 1997 Merrill Lynch – – – – Excluded15 Oct 1997 Solectron Corp Yes Yes – – Excluded17 Nov 1998 The Boeing Company Yes Yes – – Excluded

�Companies over performing the market return on the day of announcement according to Treynor’s and Jensen’s Index.��Industry types with M for manufacturing and S for services sectors.���Companies included in Ramasesh’s (1998) study.

21

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model by rendering itself to a special case of the ARFIMA model. The stochastic process Xt

is said to be both invertible and stationary if the roots of F(B) and Q(B) are outside of the

unit circle and the value of d , j0.5j. However, the process is said to be non-stationary for

d � 0.5 due to the infinite variance it possesses (Granger & Joyeux, 1980). For d [ (20.5,

0.5) and d = 0, Hosking (1981) demonstrated that the correlation function, r (.) is pro-

portional to g 2d – 1 as g! 1 and the autocorrelations of the ARFIMA process decay

hyperbolically to zero as g! 1, contrary to the faster geometric decay of a stationary

ARMA process. For d [ [0.5,1), the finite process is mean reverting and the series,

which is stationary, would fluctuate around a constant long run mean and the variance is

finite time-invariant. As such, shocks on a mean-reverting series should necessarily be tran-

sitory and dissipate over time as there is no long run impact of such an innovation to future

values of the process. According to Maddala & Kim (1998), ARFIMA processes with

0 , d , 0.5 implies thatP

g¼2nn

j r (l)j diverges as n! 1, displays long memory (or

long-range positive dependence). Essentially, these processes are more persistent, which

suggests that the autocorrelation function is decaying much slower than for the correspond-

ing I(0) series with similar ARMA parameters. For d [ (20.5, 0), the process exhibits inter-

mediate memory, or long-range negative dependence. The ARFIMA process exhibits

explosive behaviour in the series and not mean-reverting when a shock to the process

causes the process to deviate away from its initial starting point, for a value of d . 1. For

d ¼ 0, the process possesses only short memory and corresponds to the standard ARMA

model (Barkoulas & Baum, 1996).

Geweke & Porter-Hudak (1983) (hereafter abbreviated GPH) proposed a semi-

nonparametric procedure to obtain an estimate of the fractional differencing parameter

d based on the slope of the spectral density function to test for long memory. As pro-

posed by Robinson (1995), this method is implemented with trimming and smoothing

options available. The regression is computed as follows:

Y (J)k ¼ bo þ b1Xk þ jl

(J)k k ¼ Lþ J, Lþ 2J, . . . M (3)

where

Xk ¼ �2log sin (lk=2)

and

Y (J)k ¼ log

XJ

j¼1

I(lkþj�J)

" #

I(lj) is the jth period gram point, and lj ¼ 2pj=T . Assuming that J is fixed, M and L should

diverge with sample size such that M=T ! 0 and L/M! 0. According to Davidson

(2005), if in doubt, these values should be set to 0 and 1 respectively. There is evidence

of long memory if the least squares estimate of d(dGPH) is significantly larger than

0. Long memory hypothesis is supported if the least squares estimate of dGPH is signi-

ficantly different from 0.

The results of applying the GPH test on first differenced natural logarithm data are

reported in Table 2. The unit root null hypothesis is tested against the long memory

Baldrige Award Announcement and Long Memory in Shareholder Wealth 215

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alternative. Several values of dGPH are tabulated to check the sensitivity of the results.

p values were also computed and are given in parentheses below the estimates.

The results indicate that there is no long memory in any companies included in the study

for the 250 trading days after winning the MBNQA, except for one negligible occurrence.

The unit-root hypothesis cannot be rejected in favour of the long memory alternative

because the dGPHs are not significantly different from 0. These findings do not warrant

the use of ARFIMA models to examine behaviour of stock price dynamics and the empiri-

cal result is asymptotically robust to both the short-run dynamics and the underlying dis-

tribution of the series by construction of the test. By and large, this suggests that the

evidence of a unit root in the recipient companies is robust to fractional integration alter-

natives. Essentially, recipient companies failed to sustain the shareholder wealth after the

day of announcement in the long run and investors are recommended to sell stocks of reci-

pient companies shortly after the announcement of the winners of the MBNQA as their

newly generated wealth could not be sustained in the long run and this is not in direct

contradiction with the efficient market hypothesis in the semi-strong form.

Conclusion

Overall, this paper attempted to examine the long run sustainability of shareholder wealth

subsequent to the day of announcement of companies winning the MBNQA. The evi-

dence suggests that all the recipient companies did not exhibit long memory and there-

fore, it implies that the stock market is efficient in the semi-strong form with respect

to the successive one-period stock return or prices are independently distributed.

Evidently, there is no sustained increase in the shareholder wealth and companies con-

templating whether to invest their resources and efforts towards winning the MBNQA

should give up the idea as it will not lead to sustained wealth for shareholders long

after the bubble on the day of announcement. By and large, companies will probably

find that diverting their resources and energies into winning the MBNQA is futile or at

best wasteful, nor are they likely to convince their investors that the efforts will payoff

financially.

Table 2. Results of the Geweke–Porter-Hudak test for 250 trading days after winning the MBNQA

Recipient companies

GPH Motorola Xerox

Federal

express Solectron

Texas

instruments GTE Corning

ADAC

laboratories

D (0.45) 0.0583 0.1471 20.0753 0.1178 20.2821 20.0412 0.0414 20.4025p value (0.819) (0.565) (0.769) (0.645) (0.270) (0.872) (0.871) (0.116)D (0.50) 0.0358 20.0086 0.0478 20.1329 20.1195 20.0062 0.0985 20.3823p value (0.864) (0.967) (0.820) (0.527) (0.569) (0.976) (0.639) (0.069)D (0.55) 20.0029 20.013 0.0619 20.0949 20.1284 20.0372 0.0006 20.3728p value (0.986) (0.941) (0.724) (0.590) (0.465) (0.827) (0.996) (0.034)�

D(0.45), D(0.5) and D(0.55) give the d estimate corresponding to n ¼ T0.45, T0.5 and T0.55 and the ‘p value’ gives

the asymptotic probability for the null hypothesis (d ¼ 0) against the long memory alternative.�Asterisk indicates that the null hypothesis can be rejected at 5% level.

216 J. E. T. Cheah

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Acknowledgments

The author would like to express his deepest gratitude to Professor David Morris and

Associate Professor Dr Inger Boyett from the University of Nottingham. He would also

like to thank Mr Wee Sang Jong for financial support and Mr Chuah Chong Hin for

research assistance. The usual disclaimer applies

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