Academic journal article Journal of Organizational Culture, Communications and Conflict

The Benefit of a Good Reputation: An Empirical Analysis

Academic journal article Journal of Organizational Culture, Communications and Conflict

The Benefit of a Good Reputation: An Empirical Analysis

Article excerpt

INTRODUCTION

Like individuals, organizations are identified in part by the value of their good name. There is growing recognition in the business community that managerial considerations of reputation are no less significant than those involved with corporate operational, financial and legal decisions. Although a number of studies have addressed ways in which organizations might build a good reputation, the consequences of corporate reputation have been less well examined empirically. What is the value of a solid reputation once secured?

It has been suggested that reputation can serve as something of a reservoir of goodwill, both in the accounting sense (where reputation is assigned a dollar value when a firm is sold, note Davis, 1992; Bromley, 1993, citing Davis, p. 166), and in a public relations sense, where it is implied that communities will tend to give highly reputable firms the "benefit of the doubt" (Bostdorff & Vibbert, 1994; McGuire et al., 1988 [by implication], Patterson, 1993; Sobol et al., 1992). This study examines the increased importance of corporate reputation by empirically testing the premise that a good reputation serves as an intangible asset which can help protect the organization in times of corporate crises--in public relations terms, the "reservoir of goodwill" presumption.

RESEARCH QUESTION

For our purposes reputation is operationalized using the Fortune's "most admired corporations" survey rating. The crisis, or the event from which the buffer is to protect the company, is more difficult to select. While it would be interesting to study the impact of corporate reputation on disasters such as the Valdez spill or Tylenol tampering, these disasters are not comparable. They were unique and basically affected one company, or in the case of Alar, only a few companies. What is needed for the purposes of this analysis are instances where a general, unpredicted distress affected a large number of major corporations within a very narrow time frame. Additionally, such incidents must have occurred between 1982 and the present, which is the range of the corporate-reputation data set. Given these parameters, this study will examine three significant one-day stock market declines that have occurred in the past 15 years: October 19, 1987 (508 points, or 22 percent of value), October 13, 1989 (190 point drop, or 7 percent of value); and March 8, 1996 (171 points, 3 percent). Despite the wide range in percentages, all three events were among the top ten most significant point drops in the stock market of the past 15 years, as measured by the Dow Jones Industrial Average (Kansas, 1996). The selection of these three events will allow for determination of reputation effects across a range of decline severity.

The final measurement issue concerns the actual degree of economic harm suffered by the 250-350 companies in this study relative to their respective reputations. This will be determined by percent change in stock price. It is essential to note that the corporate reputation composite index is constructed from eight attributes (described below), only three of which are purely financial in nature (e.g., "financial soundness"). Furthermore, Fortune survey respondents consist of over 8,000 managers and analysts, who rate each company in their area of expertise according to their perception of that corporation. Therefore, as reputation is largely perceptual in nature, based on more non-financial than financial criteria, using stock prices to measure the concept of buffering while operationalizing economic shock as a general but severe decline in the market provides a meaningful degree of separation between event and effect. The question is: Can reputation serve to protect a company against short-term economic loss in the event of a major, sudden, general economic shock (in this case a major stock market crash or decline)?

LITERATURE REVIEW AND HYPOTHESES

The importance of reputation as an area of inquiry is underscored in the literature by its numerous suggested benefits. …

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