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Investment returns from reputation investing: do good firms provide good returns?

Author

Listed:
  • Kristine L. Beck
  • James Chong
  • Bruce D. Niendorf

Abstract

Purpose - This study aims to examine whether a good corporate reputation leads to superior investment returns. Theory and empirics provide support for the idea that a good corporate reputation improves firm value, but much of the previous research fails to consider the risk of the companies they study and relies only on accounting measures of performance such as return on assets. A complete picture of the relationship between corporate reputation and shareholder value should include risk-adjusted returns and correlation with benchmark returns. Design/methodology/approach - The Harris Poll Reputation Quotient (RQ), based on the reputations of the 100 most visible companies, suggests that companies with a “solid reputation” are more likely to be attractive investments. The authors construct portfolios using deciles and the RQ categories, rebalancing annually as RQ rankings are updated. Returns are adjusted for risk using Jensen's alpha, the information ratio, the Sharpe ratio, Modigliani and Modigliani's M2 measure, and Muralidhar's M3 measure. Findings - The results indicate that choosing a portfolio based on the highest RQ-ranked firms does outperform the market on a risk-adjusted basis, and that the relationship between rankings and time-weighted returns is roughly monotonic. The authors also observe that corporate reputation is persistent, and that the best and worst most-visible firms are more likely to be privately held. Originality/value - This research adds to the literature by including both market-based return measures and risk in the examination of the relationship between corporate reputation and financial performance.

Suggested Citation

  • Kristine L. Beck & James Chong & Bruce D. Niendorf, 2021. "Investment returns from reputation investing: do good firms provide good returns?," American Journal of Business, Emerald Group Publishing Limited, vol. 37(3), pages 109-119, October.
  • Handle: RePEc:eme:ajbpps:ajb-06-2021-0070
    DOI: 10.1108/AJB-06-2021-0070
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    Cited by:

    1. Eman Ismail & Yasser Tawfik Halim & Mohamed Samy EL-Deeb, 2023. "Corporate reputation and shareholder investment: a study of Egypt's tourism listed companies," Future Business Journal, Springer, vol. 9(1), pages 1-15, December.

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