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Corporate Reputation and Investment Performance: The UK and Us Experience

The impact of a firm's public perception on corporate and investment management is a recurring topic in finance. Numerous articles have been presented on the theoretical basis for a relationship between a firm's public image and its financial performance as well as on empirical evidence of a relationship between a firm's public perception and a firm's financial and equity market performance. In this paper, we investigate the relationship between a firm's past as well as future equity market performance and its published corporate reputation rankings. As in previous studies, our results show that "highly ranked firms in reputation" outperform, on a total equity return basis, "lowly ranked firms in reputation". In addition, as for other studies, the results in this analysis indicate that larger firms generally have higher corporate reputation rankings than smaller firms. Previous empirical results that large firms' have had both higher reputation rankings and return performance have led some researchers to posit both the benefit of firm size on firm reputation and firm reputation on firm performance. In this study, we show that the aforementioned result (e.g., firm size impacts corporate reputation and corporate reputation affects firm performance) is due primarily to the manner of corporate reputation survey collection and risk-return analysis. The results in this study show: (1) little relationship between high corporate reputation rankings and a firm's future risk-adjusted equity performance, and (2) changes in a firm's reputation ranking are related to changes in its equity market performance during the reputation survey period and thus not solely to firm size. Therefore, unlike previous studies, this research implies that it is primarily a firm's equity market performance in the pre-survey and survey period that affects published rankings of a firm's reputation qualities and that the publishing of these rankings has no impact on a firm's future risk-adjusted returns. Lastly we offer evidence as to why large firms may dominate small firms in the published reputation rankings. Our results show that, for the time period of analysis, large firms outperformed small firms in the second and third quarters of the year and small firms outperform large firms in the first quarter of the year. As a result, respondents generally witness higher returns for large firms relative to small firms during the survey period (July-September). Consequently, if a firm's equity performance affects respondents' perception of a firm's quality, large firms will dominate small firms in reported rankings of the following year. Given no new information over a following year, respondents may use last year rankings as a "naive" basis for next year rankings. Therefore, high reputation rankings may be dominated by large firms. However, empirical results also indicate that firm equity performance in the survey period also impacts rankings; that is, the fact that large (small) firms which perform poorly (well) decline (rise) in its ranking, also indicative of 'non-naive' respondents who use equity market performance as reflective of reputation ability for ranking. Thus firm size is not a sole determinant of reputation ranking. Moreover, the lack of relationship between firms' reputation rankings and risk-adjusted equity performance after the publication date is also indicative of the lack of a market reaction to reputation rankings or that the reputation ranking does not contain any new information with respect to present or past market price changes.