Email: hamish@transparently.ai
Signalling has assumed importance in the corporate world since the advent of social media. Companies, like people, need to be seen as good for a host of economic and social reasons. But what about companies that obviously try too hard? Does blatant virtue signalling necessarily signal that a company is problematic? Is there virtue signalling with a company name?
Screening companies with the words “environment” or “environmental” in their names, we find a delisting rate just shy of 25% and loss-making rate of 95%. We take this as inchoate evidence that companies that engage in blatant virtue signalling in their names deserve close scrutiny.
As many corporates and celebrities have discovered to their chagrin, a public perception of virtue signalling can be very damaging.
But is this fair? Should the public and investors be suspicious of companies that engage in blatant virtue signalling?
Virtue signalling refers to any attempt to demonstrate moral goodness without incurring any cost or effort.
Virtue signalling refers to any attempt to demonstrate moral goodness without incurring any cost or effort. Imagine, for example, two ladies who open a bake shop. Hannah calls her shop, “Hanna’s Bakery”. Martha’s is called, “The High-Tech Environmental Earth-Saving Pure and Sustainable Bakery”. We don’t know Hannah or Martha. We don’t know whether they source sustainable product or employ low energy baking technology. However, thousands of years of evolution have taught humans to be suspicious of the blatant virtue signalling in Martha’s business name.
This suspicion is confirmed by studies of signalling behaviour in psychology, economics, and evolutionary biology which tell us that signals that do not incur any cost might indicate dishonesty or weakness.
… signals that do not incur any cost might indicate dishonesty or weakness.
Putting signalling theory to the test we examined all of the companies in our database that, like Martha, used the words “environment” or “environmental” in their name. These words signal goodness and might be an example of virtue signalling.
In our database, fifty six companies used the words environment or environmental in their name globally. Of these, 15 have been delisted and 11 are newly listed. The remaining 31 have been established for some years. The delisting rate of companies with environmental in the name is high at 26.8%, with only one being due to acquisition. Delisted companies had an average accounting manipulation risk score of 89% in the year prior to de-listing. It is probable nearly all were significantly manipulating their accounts.
All but three companies with environment or environmental in their names are loss making.
The 31 established companies with the word environmental in the name have an average manipulation risk score of 31%. This score is better than average considering the size of these companies, but closer inspection reveals that all but three of these companies are loss-making. It is more difficult for companies that consistently make losses to manipulate their accounts than companies making a profit. In a sense, there is nothing much left to hide. Of the companies with a risk score below 20%, and thus with a significantly below average risk of accounting manipulation, none had a Big 4 auditor and all showed high risk of manipulation on pure accounting measures such as asset quality, working capital signals or accruals. All were loss-making.
The newly listed companies possessed a median accounting manipulation risk score of 26%. This is much better than average for companies of this size but, once again, all were loss-making.
This case study suggests that companies engaged in blatant virtue signalling are likely to be financially weak but not necessarily higher risk in terms of accounting manipulation.
On balance, the evidence from this case study suggests that companies using the words environment or environmental in their names are typically financially weak and might be virtue signalling to bolster their public image. These companies show better than average manipulation risk for their size, but this might be explained by the fact that they are loss-making. Ultimately, extended poor financial performance is strongly associated with greater incentive to engage in significant accounting manipulation.
Based on this case study, early evidence suggests that investors should be wary of companies that employ virtue signalling in their names.
