Corporate Reputation and Bankruptcy Risk

Abstract

In view of the influence of corporate reputation on investors' choices and risk concerns, the purpose of this study was to explore the relationship between corporate reputation and bankruptcy risk in public firms. The investigation is a contribution to the burgeoning literature on corporate reputation associated with accounting, despite reputation being classified as an intangible asset capable of generating competitive advantage. Our sample included 4,578 observations (441 firms) covering the period 2005-2016. The overall score on the World's Most Admired Companies ranking was used as a proxy for reputation. Bankruptcy risk was quantified by Altman Z-scores (Zang, 2012) and accounting information for each year in the period was retrieved from the database Compustat Global. Our results reveal that corporate reputation has a negative influence on bankruptcy risk, reiterating the importance of risk management. When firms attract and strive to secure the favor of stakeholders, they increase risk for the same reason. However, this effect is counterbalanced by good reputation. Thus, corporate reputation is a valuable strategic resource with which managers can boost confidence among investors, increase the firm's credit worthiness and perpetuate the organization on the market. Furthermore, these results expand the literature on corporate reputation and risk of bankruptcy, and show signs that companies with high reputation have lower risk of bankruptcy and tend to honor their debts.

The impact of corporate social responsibility on innovation in small and medium‐sized enterprises: The mediating role of debt terms and human capital

“…The companies that practice CSR most actively have greater access to credit and obtain better debt terms (Goss & Roberts, 2011; Xu et al, 2019), so CSR helps to alleviate financial restrictions (Al‐Hadi et al, 2019; Cheng et al, 2014; Giannarakis & Theotokas, 2011). An adequate CSR policy improves a firm's reputation (Ansong, 2017), which leads to an increase in corporate credibility, reducing the risk of bankruptcy and other financial problems (Gois et al, 2020; Belas et al, 2020). By limiting opportunistic behavior by administrators through CSR practices, asymmetric information decreases (Eccles et al, 2012).…”

Does reputation matter for firm risk in developing country?

“…Opler and Titman (1994) found that there is a positive relationship between performance and financial default risk. Gangi et al (2020) and Góis et al (2020) surmise that reputation may affect the distress condition of a firm. Lower reputation is related to the contingency cost and operational risk leading to lower trust from stakeholders; hence, increasing the financial distress.…”

“…The research of reputation has been investigated by researchers of a wide range of fields, including finance, accounting, economics, marketing, sociology, and organization theory (Gois, Lima, Luca, & Silva, 2020). However, there is no consistent consensus for reputation.…”

“…The premise is that reputation is a key factor in a competitive and complex business world. Without managing or governing reputation as part of resources, it sends signals to the stakeholder about the mismanagement, hence, increasing the risk (Góis, Luca, Lima, & Medeiros, 2020; Heidinger & Gatzert, 2018). Intriguingly, the argument on the effect of reputation on risk has less attention (Delgado‐García et al, 2013; Gangi, Daniele, & Varrone, 2020; Góis et al, 2020; Gonzalez Sanchez & Morales de Vega, 2018; Henkel, 2009).…”

CSR Expenditures, Financial Distress Prediction, and Firm Reputation: A Pathway Analysis

“…Kanwal, Khanam, Nasreen, & Hameed (2013) showed evidence where CSR activities enhance both reputation and profitability. Further, Gois, de Lima, de Luca, & da Silva (2017) found that a firm's reputation has a negative causal relationship on bankruptcy risk. Another study by Casado, Yanez, & Pelaez (2016) also found a similar finding.…”