Well Known or Well Liked? The Effects of Corporate Reputation on Firm Value at the Onset of a Corporate Crisis

Abstract

Research summary:We study how two dimensions of reputation (i.e., generalized favorability and being known) and attribution of crisis responsibility affect firm value at the onset of a crisis. Analyzing 126 corporate crises befalling publicly listed firms in China from 2008 to 2014, we find that generalized favorability serves as a buffer, while being known can be a burden, in influencing firm value. We also find that the buffering effect of generalized favorability is stronger when the attribution of crisis responsibility is low (vs. high). In addition, there is a negative interaction effect between the two dimensions of reputation such that the buffering effect of generalized favorability weakens when firms are better known. We discuss our contributions to research on corporate reputation and crisis management. Managerial summary:Corporate reputation is an intangible asset, especially at the onset of a corporate crisis. This research sheds light on the "double-edged sword" of corporate reputation by examining the effects of two reputation dimensions (i.e., being liked and being known) on firm value. Our results suggest that well-liked firms can leverage their generalized favorability among stakeholders to assuage firm value loss, whereas well-known firms may have to better communicate with stakeholders to overcome the burden of stakeholders' attention that escalates firm value loss. To better cope with the onset of a crisis, firms should therefore enhance their generalized favorability and simultaneously avert stakeholders' excessive attention. In addition, well-liked firms can further buffer against the loss in firm value by reducing the perceived intentionality of a crisis.

Corporate reputation and firms' performance: Evidence from Spain

“…The results show a decline in shareholder value as a consequence of negative events, and this decline is smaller for firms that are engaged in CSR activities than for firms that are not. Wei, OuYang, and Chen () analyze 126 corporate publicly listed firms in China from 2008 to 2014 (but using 3 day CAR) and find a relationship between corporate reputation and the firm's economic performance. Lo and Kwan () study a sample of 48 events related to 17 listed companies in Hong Kong and conclude that the market reacts more positively to ESG (environmental social governance) initiatives than initiatives related to sustainability.…”

Proactive Corporate Environmental Responsibility and Financial Performance: Evidence from Chinese Energy Enterprises

“…CER as a signal can decease the impact of information asymmetry [32]. Wei, Shen, Zhou and Li [4] used a dataset of 238 Chinese firms and found that CER practices, as a signal, have positive effects on business.Wei, et al [33] analyzed 126 listed firms in China and concluded that high reputation firms can assuage firm value loss. Using a social identity theory perspective of CER signals, Farooq, et al [34] analyzed the mechanisms through which the internal and external CER influenced employee identification and the subsequent outcomes.…”

Entrepreneurial Resources, Complementary Assets, and Platform Sustainability

“…There are many factors affecting corporate reputation. Schwaiger classified the factors affecting corporate reputation into four categories: quality, performance, responsibility, and attractiveness [11].…”

“…Corporate reputation includes two dimensions: favorability and popularity. Favorability reflects the evaluation and judgment of stakeholders, while popularity reflects the non-evaluation recognition of stakeholders [11]. These two dimensions are conceptually different, as well-known companies may be loved or hated [38].…”

“…Corporate reputation is an aggregation of organizational responses to the needs and expectations of numerous organizational stakeholders as perceived by stakeholders [10], including two dimensions: emotional reputation (generalized favorability) and cognitive reputation (being known) [11]. There are many factors that can affect corporate reputation, including product and service quality, corporate social responsibility, attractiveness, and corporate performance [12,13].…”