Academic journal article Southern Journal of Business and Ethics

Looking beyond the Pale: Evidence That Investors Look beyond Concurrent Annualized Returns in Assigning Corporate Reputtaions

Academic journal article Southern Journal of Business and Ethics

Looking beyond the Pale: Evidence That Investors Look beyond Concurrent Annualized Returns in Assigning Corporate Reputtaions

Article excerpt

INTRODUCTION

The accurate measurement of corporate reputations is critical from both an internal and external perspective. From an internal perspective, accurate current information is necessary to effectively manage a firm's reputation. A firm needs to know whether it should take steps to reinforce its positive current reputation or revise its practices as the business attempts to improve its negative reputation. Without a reliable measure of reputation, a firm does not know the extent to which recent events and additional information available to the public have helped or hindered its reputation. From the outside of the firm, investors benefit from reliable reputation information when evaluating a company as a potential investment opportunity. Our research is based on the premise that the Reputation Quotient (RQ) developed by the Reputation Institute in conjunction with Harris Interactive is a credible measure of a firm's reputation. Based on this assumption, we compared the stock market performance of the ten firms with the highest RQs (TOP10) to the ten firms with the lowest RQs (BOT10) taken from a list of the 60 company's RQs published each year.

This is not the first study comparing the performance of firms with high RQs to those with low RQs. Prior research (e.g., Krueger and Wrolstad (2007), Krueger, Wrolstad, and Van Dalsem (2009) and Krueger, Wrolstad, and Van Dalsem (2010)) assumes an investment horizon of one year regardless of the duration of the intervening period between annual publication of RQ values. As shown in Table 2, the time between public announcements has ranged from 256 to 507 days. The artificial assumption that the RQ's impact lasts for exactly 365 days has the potential to confound the results. When the interval between RQ announcements is short, there has been an understatement of the impact of a given RQ announcement. At the opposite extreme, when the interval between RQ announcements is long, the impact of a given RQ announcement is overstated. For instance, if either the TOP10 or BOT10 portfolio earned a 0.25 percent market monthly excess return, an eight-month interval would find a 2.0 percent rate of excess performance, while a 17-month interval would be assigned a 4.25 percent rate of excess performance if you ignore the effects of compounding. The variation in excess performance is likely to diminish the statistical significance of the effect being considered. Although one could argue that an investor using the RQ methodology could shift to cash twelve months after an RQ announcement, it is more probable that they would leave their funds in an RQ-based portfolio awaiting the next RQ press release. For this research, we recast the holding period returns into annualized return streams and we have completed a detailed investigation of return, risk, and risk-adjusted return performance. An additional change from previous work done by Krueger, et. al. is the seventy-five percent increase in observations available which is achieved by the passage of the years since the previous research was completed.

The following literature review reveals the results observed in prior studies of corporate reputation, returns tied to corporate reputation, and the RQ measure itself. Findings of our research are then presented and followed with some suggestions to further investigate the relevance of the RQ measurement of corporate reputation.

LITERATURE REVIEW

Measuring Corporate Reputation

Unfortunately, there is no single, agreed upon metric by which corporate reputation is measured. Six different definitions of corporate reputation are examined by Lloyd and Mortimer (2006), noting that the importance of key relevant firm characteristics (i.e., ethics, product, performance) in setting reputation opinions varies by stakeholder group. The proliferation of reputation measures encourages chaos and confusion regarding the value of a company's reputational assets. Wartick (2002) finds that there is a deficiency in terms of both the definition of corporate reputation and data used to measure reputation once the definition is set. …

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