Financial Analysis and the Predictability of Important Economic Events

By Ahmed Riahi-Belkaoui | Go to book overview

10

The Prediction of Corporate Reputation

INTRODUCTION1

The reputation of a firm is important for various decisions ranging from resource allocation and career decisions to product choices, to name only a few. 2 It is an important signal of the firm’s organizational effectiveness. Favorable reputations can create favorable situations for firms that include (1) the generation of excess returns by inhibiting the mobility of rivals in an industry, 3 (2) the capability of charging premium prices to consumers, 4 and (3) the creation of a better image in the capital markets and to investors. 5

With two exceptions, most previous empirical investigations have examined the relationship of earnings performance and social performance. 6 Two studies, however, investigated the relationship between reputation and various economic and noneconomic criteria that may be used by corporate audiences to construct reputations. 7,8 Although the signals used in these two studies show attendance by corporate audiences to different information cues, we propose that of most importance to these parties are signals about asset management performance. We therefore propose specific hypotheses relating assessments of reputation to various information signals about a firm’s asset management performance, specifically using accounting and market signals, which indicate size of assets, market assessment of the value of the assets in place, asset turnover, and profit margin.


RELATED RESEARCH

Two studies have investigated the determinants of reputation building. Based on the thesis that an organization’s social performance is an indistinguishable

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