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G o o d - to- Great Selection Process
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- C u t 2 : From Companies to Companies
| G o o d - to- Great Selection Process We used a sifting process with increasingly tighter screens to find our companies. The sifting process had four layers of analysis I CRSP ndustrv C u tb b : F r om the Universe of Companies to 1 , 4 3 5 C om pan i es We elected to begin our search with a list of companies that appeared on the Fortune of America's largest public companies, going as far back as 1965, when the list came into existence. Our initial list consisted of all companies that appeared on the 1965, 1975, 1985, and 1995 listings. There were 1,435 such companies. Most people know these as the "Fortune 500," although the total number of companies listed maybe as many as 1,000 Appendix 221 because Fortune occasionally changes the size and format of its lists. As abase set to begin our analysis, the Fortune largest-companies ranking has two key advantages. First, it lists only companies of substantial size (companies earn their way onto the list by annual revenues. Therefore, nearly every company in the Fortune ranking met our criterion of being an established ongoing company at the time of transition. Second, all companies in the Fortune ranking are publicly traded, which allowed us to use financial stock return data as the basis for more rigorous screening and analysis. Privately held companies, which do not have to meet the same accounting and disclosure standards, offer no opportunity for an apples-to-apples, direct comparison analysis of performance. Restricting our set to the Fortune has one obvious dis- It limits our- analysis to We concluded, however, that greater rigor in the selection process-made possible by using only publicly traded US. firms that hold to a common reporting standard (apples-to-apples stock return data)-outweighed the benefits of an international data set. C u t 2 : From Companies to Companies Our next step was to use data from the University of Chicago Center for Research in Security Prices (CRSP) to make our final selection of good-to- great companies. We needed, however, a method to pare down the number of companies to a manageable size. We used the published Fortune rates-of- return data to reduce the candidate list. Fortune calculates the ten-year return to investors for each company in the back to 1965. Using this data, we reduced the number of companies from 1,435 to 126. We screened for companies that showed substantially above-average returns in the time spans of 1985-1995, 1975-1995, and 1965-1995. We also looked for companies that showed a pattern of above-average returns preceded by average or below- average returns. More specifically, the 126 companies selected passed anyone of the following tests Test 1: The compound annual total return to investors over the period 1985-1995 exceeded the compound annual average return to investors for the Fortune Industrial and Service listings over the same period by 30 percent total returns exceeded average returns 1.3 times, and the company showed evidence of average or below-average performance in the prior two decades (1965-1985). Test 2: The compound annual total return to investors over the period 1975-1995 exceeded the compound annual average return to investors for the Fortune Industrial and Service listings over the same period by 30 percent total returns exceeded average returns by 1.3 times, and the company showed evidence of average or below-average performance in the prior decade (1965-1975). 222 Appendix Test 3: The compound annual total return to investors over the period 1965-1995 exceeded the compound annual average return to investors for the Fortune Industrial and Service listings over the same period by 30 percent total returns exceeded average returns by 1.3 times. The Fortune listings do not contain ten-year returns before 1965, so we decided to include all top performers over the three-decade period in the initial set. Test 4: Companies founded after 1970 and whose total return to investors over the period 1985-1995 or 1975-1995 exceeded the average return to investors for the Fortune Industrial and Service listings over the same period by 30 percent total returns exceeded average returns by 1.3 times) but that did not meet the above criteria due to alack of data in the Fortune list in prior decades. This allowed us to closely consider any companies that performed well in later decades but did not show up earlier on the Fortune listings. The 1970 cutoff also allowed us to identify and eliminate from consideration any companies with histories too short to be a legitimate transition company. Download 3.69 Mb. Share with your friends:
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