High‐Reputation Firms and Their Differential Acquisition Behaviors

Research summary: E merging reputation research suggests that high‐reputation firms will act to maintain their reputations in the face of high expectations. Yet, this research remains unclear on how high‐reputation firms do so. We advance this research by exploring three questions related to high‐reputation firms' differential acquisition behaviors: Do high‐reputation firms make more acquisitions than similar firms without this distinction? What kind of acquisitions do they make? How do investors react to high‐reputation firms' differential acquisition behaviors? We find that high‐reputation firms make more acquisitions and more unrelated acquisitions than other firms. Yet, we also find that investors bid down high‐reputation firms' stock more than other firms' in response to acquisition announcements, suggesting that investors are skeptical of how high‐reputation firms maintain their reputations . Managerial summary: W e know that high‐reputation firms wish to maintain their elite standing in the face of high‐market expectations, but we know little about how they do so. We explore this puzzle by investigating how reputation maintenance influences high‐reputation firms' acquisition behaviors. We classify high‐reputation firms are those firms that make Fortune's M ost A dmired annual list, and we find that high‐reputation firms make more acquisitions and more unrelated ones than other firms. Surprisingly, we also find that the market tends to react negatively to these acquisitions. Thus, managers may want to reconsider their strategy of making acquisitions as a means to maintain their firms' high reputations . Copyright © 2017 John Wiley & Sons, Ltd.     

The effects of corporate reputation perceptions of the general public on shareholder value

Superior corporate reputations can have strategic value for firms. Of the “multiple reputations” associated with each firm, we focus on the perceptions of the general public. The public represents the most widely defined stakeholder group but has attracted the least amount of research interest to date. Drawing on data for German firms, this study demonstrates that superior reputation perceptions issued by the general public increase shareholder value, as measured by future stock returns. This study provides a more nuanced understanding for this novel finding. Applying a conceptualization of reputation that balances both its affective and cognitive components, we find that reputation perceptions that are driven by nonfinancial aspects are more value relevant in the future than reputation perceptions that are driven by previous financial performance. Copyright © 2014 John Wiley & Sons, Ltd.     

Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials

Research summary: We contribute to the corporate political activity (CPA ) literature by showing that investors value companies that host visits of high‐ranking government officials (P resident and P remier). We argue that investors may value host official visits for two reasons: (1) the signal received about possibility of firm accessing government‐controlled resources via promotion or protection; and (2) the certification effect from such high‐powered visitors elevating the firm's reputation and legitimacy. Results from an event study analysis of 84 high‐ranking government official visits in C hina from 2003 to 2011 indicate that investors responded positively to host firms as reflected by stock market performance. Furthermore, the greatest positive reactions accrued to firms experiencing weaker prior period financial performance and to firms that are privately compared to state‐controlled . Managerial summary: Do visits by high‐ranking government officials influence firm stock market performance? Studying a sample of C hinese public firms that hosted 84 visits by the C hinese P resident and the P remier from 2003 to 2011, we find that investors reacted positively to such visits compared with a group of non‐host firms from the same industry and with similar financial performance and size. In addition, firms with weaker prior financial performance and private firms benefit the most from hosting such visits. Our findings imply that hosting visits of high‐ranking government officials can signal future government‐controlled resource inflows and boost host firms' reputation and legitimacy . Copyright © 2016 John Wiley & Sons, Ltd.     

Role of resource gap and value appropriation: effect of reputation gap on price premium in online auctions

In this study, we draw on the resource‐based view of the firm and on value‐based models of strategy to examine when firms appropriate value from their superior resources. We argue for the need to take into account the role of the resource gap between competitors rather than the absolute resource stock of the focal firm when examining the resource‐performance relationship. In particular, we investigate whether the ability of a reputable seller to command a price premium is influenced by the reputation gap (i.e., the reputation differences between the focal seller and its closest competitor standardized by the reputation stock of both sellers). We test our hypotheses on 72 matched pairs of online transactions screened from more than 2,000 auctions of new mobile phones on the Polish Internet auction site Allegro. We find that the ability of a reputable seller to command a price premium (1) increases with the size of the reputation gap between the focal seller and its matched competitor, and (2) becomes increasingly smaller for each additional unit of the seller reputation gap. Copyright © 2010 John Wiley & Sons, Ltd.     

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

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. Copyright © 2017 John Wiley & Sons, Ltd.     

Overcoming Institutional Voids: A Reputation‐Based View of Long‐Run Survival

Research summary : Emerging markets are characterized by underdeveloped institutions and frequent environmental shifts. Yet, they also contain many firms that have survived over generations. How are firms in weak institutional environments able to persist over time? Motivated by 69 interviews with leaders of emerging market firms with histories spanning generations, we combine induction and deduction to propose reputation as a meta‐resource that allows firms to activate their conventional resources. We conceptualize reputation as consisting of prominence, perceived quality, and resilience, and develop a process model that illustrates the mechanisms that allow reputation to facilitate survival in ways that persist over time. Building on research in strategy and business history, we thus shed light on an underappreciated strategic construct (reputation) in an undertheorized setting (emerging markets) over an unusual period (the historical long run). Managerial summary : Why are some firms able to persistently survive in challenging, uncertain, and underdeveloped business environments? To explore this question, we analyze in‐depth interviews with leaders of emerging market firms that have survived over decades and even centuries. We find that firm reputation is a key strategic driver, and propose new ideas about the ways through which reputation facilitates survival. We elaborate how a favorable reputation allows a firm to more fully utilize its existing resources by decreasing uncertainty. We also propose that reputation has offensive and defensive properties that make it valuable to firms during both positive and negative economic cycles. Finally, we discuss why a reputation‐based source of competitive advantage is hard to imitate, and outline three general approaches for building reputation. Copyright © 2017 John Wiley & Sons, Ltd.     

The impact of norm‐conforming behaviors on firm reputation

Deviance from social norms has been extensively examined in recent strategy research, leaving the strategic implications of conformity largely unexplored. In this article, we argue that firms can elect to conform to a norm along two dimensions: compliance with the goal and level of commitment to the procedures. We then produce a typology of four norm‐conforming behaviors, which allows us to isolate differentiated effects of conformity on firm reputation. We examine the corporate environmental disclosures of 90 U.S. firms and find that firms derive different reputational rewards depending on whether they conform to the goal or procedure dimension of the environmental transparency norm. In addition, the relationship between conformity and reputation is moderated by the firm's prior reputation and the stringency of the normative environment. Copyright © 2011 John Wiley & Sons, Ltd.     

The Role of Managerial Stock Option Programs in Governance: Evidence from REIT Stock Repurchases

This article examines the role of stock option programs and executive holdings of stock options in real estate investment trust (REIT) governance. We study the issue by analyzing how the market reaction to a stock repurchase announcement varies as a function of the individual REIT's governance structure. In particular, we examine how executive and employee stock option holdings influence the market reaction to a firm's announcement of a stock repurchase. Using a sample of REIT repurchase announcements, we find that the market reacts more favorably to announcements by firms where executives have larger option holdings and the chief executive officer is not entrenched. Our results with respect to the roles of stock option holdings of executives and nonexecutives differ from those reported for a cross-section of non-REIT firms. While we find evidence supporting the importance of executive stock options in aligning the incentives of management and reinforcing the positive signaling associated with a repurchase announcement, we find little evidence that the market views REIT repurchases as being used primarily to fund option exercise. We attribute these findings to greater dependence by REIT investors on internal governance mechanisms (such as stock option programs) as a result of regulatory restrictions that limit external monitoring such as hostile takeovers.     

Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

Is doing more doing better? The relationship between responsible supply chain management and corporate reputation

Responsible supply chain management (RSCM) can help protect a firm's corporate reputation by shielding it from negative media attention and consumer boycotts. RSCM can also enhance a firm's corporate reputation, which allows firms to secure business contracts and penetrate new market segments successfully. This study empirically examines: (i) the extent to which responsible supply chain management practices is driven by a desire to protect corporate reputation; and (ii) whether responsible supply chain management can enhance corporate reputation and thereby generate competitive advantage to the firm. We draw on primary and secondary datasets across seven firms, spanning the publishing, technology, beverage, tobacco, finance and home improvement sectors. We find compelling evidence to suggest that firms often engage in RSCM due to a desire to protect corporate reputation. Similarly, we find empirical evidence to suggest that responsible supply chain practices can enhance reputation and thereby create competitive benefits, although this link is not as profound as the relationship between RSCM and reputation protection and there are significant variations across industries. These findings have significant implications for marketing theory and, in particular, industrial marketers, who are increasingly expected to implement responsible supply chain practices.     

The Pricing of Seasoned Equity Offerings: Evidence from REITs

Real estate investment trusts (REITs) have been a very active sector in the capital market over the last few years. This paper examines the pricing of seasoned equity offers by equity REITs during 1991–1996. Consistent with Parsons and Raviv's model, we find that SEOs by REITs are underpriced with respect to both the closing price on the day before and the closing price on the day of the offer. Underpricing depends on the institutional ownership of the firm's common stock. Issues by firms with higher institutional ownership are more underpriced for post-1990 REITs. Further, consistent with the notion that theories of IPO pricing apply to SEOs as well, the underpricing of SEOs is a function of the issue size and of the underwriter's reputation.     

Managing corporate-government relationships in a multi-cultural setting: How political corporate social responsibility (PCSR) as a response to legitimacy pressures affects firm reputation

As many multinationals set up subsidiaries in emerging markets, they face legitimacy pressures from the host countries. This pressure leads firms to engage in political corporate social responsibility (PCSR) activities. We distinguish two types of attributions of PCSR activities – public-serving and self-serving – and study how these two types of PCSR attributions affect firm reputation. Analyzing 463 PCSR activities by 104 firms in China between 2015 and 2017, we find that public-serving PCSR enhances firm reputation, while self-serving PCSR diminishes it. In addition, we document a negative interaction effect between the two attributions of PCSR. We also find that CEO participation attenuates the negative effect of self-serving PCSR whereas administrative distance accentuates the positive effect of public-serving PCSR. Our research contributes to the nascent literature on government relation networks and sheds light on how firms should manage their relationships with the host countries in a multi-cultural setting.     

Cooperative R&D and the Value of the Firm

In this paper, we investigate the stock price responses of listed firms in the U.S. markets to announcements of R & D collaborations. We find that abnormal returns of stocks are significantly positive after R & D collaborations are announced. The positive stock price response towards the R & D cooperation initiations can be partially explained by the nature of the collaborations and the characteristics of the participating firms. We also find that the stock prices of rival firms respond negatively to announcements of R & D cooperation. This result seems to support the hypothesis that cooperative R & D improves economic efficiency of the cooperative firms that gain competitive advantage. We do not find evidence supporting the hypothesis that R & D cooperation creates collusive, anticompetitive effects in the product market.     

Corporate reputation and sustained superior financial performance

Good corporate reputations are critical because of their potential for value creation, but also because their intangible character makes replication by competing firms considerably more difficult. Existing empirical research confirms that there is a positive relationship between reputation and financial performance. This paper complements these findings by showing that firms with relatively good reputations are better able to sustain superior profit outcomes over time. In particular, we undertake an analysis of the relationship between corporate reputation and the dynamics of financial performance using two complementary dynamic models. We also decompose overall reputation into a component that is predicted by previous financial performance, and that which is ‘left over’, and find that each (orthogonal) element supports the persistence of above‐average profits over time. Copyright © 2002 John Wiley & Sons, Ltd.     

Unmixed signals: How reputation and status affect alliance formation

We analyze how incumbents in technology‐driven industries are influenced by founders' reputation and status when considering strategic alliances with newly emerging firms. We theorize that reputation and status represent two distinct components of perceived quality that exert independent and interdependent effects on alliance formation. Using literature on impression formation processes to derive predictions of signal congruence, we argue that the independent effects of reputation and status are amplified when the two are congruent, and that the effect of negative congruence (both reputation and status are low) is stronger than positive congruence (both are high). We find support for our arguments based on panel data on alliances between pharma and biotech firms, using data on biotech scientists' research output (reputation) and university attended (status). Copyright © 2013 John Wiley & Sons, Ltd.     

Stepping across for social approval: Ties to independent foundations' boards after financial restatement

Research Summary: Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non‐restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non‐restating peers. Our study offers a nuanced analysis of the post‐crisis actions of restating firms relative to non‐restating peers and highlights the relevance of ties to nonprofit boards for corporate governance. Managerial Summary: Firms oftentimes fire their top executives in the aftermath of misconduct, but such response is itself disruptive for the firm's operations. Instead, we suggest that forging ties to independent foundations can help firms in such contexts without unsettling effects. Our results show that, after a restatement event, CEOs of misconduct firms are especially likely to join new foundation boards as trustees and thus seem to be aware of the benefits of these associations. CEOs from firms with existing in‐house philanthropy or a high reputation do not join as many new foundations' boards of trustees. We also find that new firm‐foundation links are promptly and positively evaluated by the media, thus helping misconduct firms regain social approval.     

Explaining temporal orientation: Evidence from the durability of firms' capital investments

In contrast to broad generalizations about the short‐termism of managers, this paper explains changes in the temporal orientation of specific firms over time based on performance relative to aspirations and top management team incentives. We gain empirical traction on temporal orientation by measuring the durability of acquired property, plant, and equipment (asset durability) from reported data on depreciation expense. Consistent with predictions, we find that performance relative to aspirations positively influences asset durability. Surprisingly, we find no evidence that stock‐based compensation produces the same effect. Instead, we find stock‐based compensation lowers asset durability. Copyright © 2011 John Wiley & Sons, Ltd.     

Does brand partnership create a happy marriage? The role of brand value on brand alliance outcomes of partners

In this paper, we investigate an under-researched issue by examining the financial performances of both partner firms in a brand alliance. We find that a participating firm's brand value and other brand characteristics are associated with not only its own financial performance but also its partner's financial gains from the collaboration. Our results show that the participating firm gains higher stock returns when its partner's brand value is higher. However, brand value differential reduces the positive effect of brand value on the partner firm's financial performance. In addition, the primary partner's brand alliance experience helps increase the positive effect of primary partner's brand value on the stock returns of the secondary partner. The secondary partner's brand exploitation attenuates the positive effect of secondary partner's brand value on the stock returns of the primary brand firm.     

The impact of market actions on firm reputation

Drawing on signaling theory, we hypothesize that a firm's reputation is shaped by its own market actions and the actions of its industry rivals. We view market actions as signals that convey information about the underlying competencies of firms and influence stakeholder evaluations of them. We find that the total number of a firm's market actions, the complexity of its action repertoire, the time lag in rivals' responses to its actions, and the similarity of its repertoire with those of its rivals positively affect its reputation. These results suggest that a firm's reputation is influenced both by its own actions and by its rivals' actions. Copyright © 2006 John Wiley & Sons, Ltd.     

Winning us with trifles: Adverse selection in the use of philanthropy as insurance

Research Summary: We study the use of corporate philanthropy as a form of reputation insurance, developing a formal model of such insurance to examine how the terms of insurance in equilibrium change under different assumptions about the firm and its stakeholders. We then test the predictions from this model in the U.S. petroleum industry and find that philanthropic donations offer insurance‐like benefits, but are also positively associated with subsequent oil spills—firms that give more, spill more—with this association being stronger for spills that are under firms’ control and in states with low civic capacity. These results are consistent with an adverse selection/moral hazard equilibrium and suggest that the use of philanthropy as reputation insurance may benefit firms at the cost of society. Managerial Summary: Firms that donate to social causes develop a reputation for being socially responsible, and are often given the benefit of doubt when negative information about them comes to light. But are philanthropic firms truly more responsible? We argue that firms that donate more may be more likely to do harm—those that expect to do harm later are likely to give more now, and those that know their reputation protects them may become less careful. Evidence from the U.S. petroleum industry is consistent with this argument, with firms that give more having more subsequent oil spills, but only the type of spills that are under the firm's control, and only in states where the firm faces weaker scrutiny.