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

• Date: 01 October 2017
• Published date: 01 October 2017
• DOI: http://doi.org/10.1002/smj.2639

Strategic Management Journal

Strat. Mgmt. J.,38: 2103–2120 (2017)

Published online EarlyView 23 March 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2639

Received 9 December 2014;Final revision received19 December 2016

Well Known or Well Liked? The Effects of Corporate

Reputation on Firm Value at the Onset of a Corporate

Crisis

Jiuchang Wei,1Zhe Ouyang,1and Haipeng (Allan) Chen2*

1School of Management, University of Science and Technology of China, Hefei,

China

2Department of Marketing, Mays Business School, Texas A&M University, College

Station, Texas

Research summary: We study how two dimensions of reputation (i.e., generalized favorability

and being known) and attribution of crisis responsibility affect rm value at the onset of a crisis.

Analyzing 126 corporate crises befalling publicly listed rms in China from 2008 to 2014, we nd

that generalized favorability serves as a buffer, while being known can be a burden,in inuencing

rm value. We also nd that the buffering effect of generalized favorability is stronger when the

attribution of crisis responsibilityis low (vs. high). In addition, there is a negative interaction effect

between the two dimensions of reputation such that the bufferingeffect of generalized favorability

weakens when rms 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 rm

value. Our results suggest that well-liked rms can leveragetheir generalized favorability among

stakeholders to assuagerm value loss, whereas well-known rms may have to better communicate

with stakeholders to overcome the burden of stakeholders’ attention that escalates rm value

loss. To better cope with the onset of a crisis, rms should therefore enhance their generalized

favorability and simultaneously avert stakeholders’ excessive attention. In addition, well-liked

rms can further buffer against the loss in rm value by reducing the perceivedintentionality of a

crisis. Copyright © 2017 John Wiley & Sons, Ltd.

Introduction

The concept of corporate reputation, dened as

“a perceptual representation of a company’s past

actions and future prospects that describes the

rm’s overall appeal to its key constituents,” has

received considerable attention in the literature

Keywords: corporate reputation; crisis management;

shareholder value; attribution of crisis responsibility;

investors

*Correspondence to: Haipeng (Allan) Chen, Department of Mar-

keting, Mays Business School, Texas A&M University, 220P

WehnerBuilding, 4112 TAMU, College Station, TX 77843-4112.

E-mail: hchen@mays.tamu.edu

Copyright © 2017 John Wiley & Sons, Ltd.

(Fombrun, 1996, p. 72; Lange, Lee, & Dai, 2011;

Rindova, Williamson, Petkova, & Sever, 2005).

Corporate reputation is an important quality signal,

and inuences evaluators’ decision-making process

(Frooman, 1999). Particularly at the onset of a cri-

sis when information is scarce and uncertainty is

high, the information asymmetry between rms and

their external stakeholders creates a context wherein

reputation is an important consideration in stake-

holders’ evaluation. Therefore, corporate reputation

is critical in shaping evaluators’ initial perceptions

and responses at the onset of a crisis, and ultimately,

inuences a rm’s nancial performance.

2104 J. Wei, Z. OuYang, and H. Chen

Corporate crises, as negative events that violate

stakeholders’ collective favorable perceptions of a

rm, are likely to trigger negative media coverage

(Davies, Chun, & Kamins, 2010; Godfrey, Mer-

rill, & Hansen, 2009; Zavyalova, Pfarrer, & Reger,

2012), generate widespread and negative percep-

tions among stakeholders (Coombs, 2007), and pose

both nancial and nonnancial threats to the rm

and to its stakeholders (Dean, 2004; Pearson &

Clair, 1998). While corporate reputation has been

widely studied, its effect on rm value during a

crisis has been debated. On the one hand, corpo-

rate reputation is widely recognized as an intangi-

ble asset (Pfarrer, Pollock, & Rindova, 2010), and

thus, may play a value-preserving role in times of a

negative event(Jones, Jones, & Little, 2000; Pfarrer

et al., 2010). For example, Tesla’s stock went down

by about 30% after a video showing its S-model

catching re, but recovered and went on to new

highs in just a few months.1Similarly, Apple was

able to win back its customers in just 2 weeks after a

public relations crisis accusing the rm of discrimi-

natory warranty and customer service in China.2On

the other hand, a favorablereputation could also be a

liability for a rm and aggravate the negativeimpact

of a crisis (Rhee & Haunschild, 2006). Volkswagen

is a recent example of a reputable rm that suffered

from serious public and media criticism, and a fall

in stock price, after the rm was found to cheat on

emissions tests.3Similarly,the “melamine” incident

led to the overnight downfall of Sanlu, a house-

hold dairy brand in China.4The theoretical tension

between the value-preserving and liability effects of

corporate reputation highlights the need for a better

understanding of the effects of corporate reputation

on rm value during a corporate crisis.

In addition to prior social perceptions such as cor-

porate reputation, situational factors may also play

a critical role in affecting how stakeholders make

sense of a crisis. A well-studied situational factor in

understanding how rm value reacts to a corporate

crisis is stakeholders’ attribution of crisis responsi-

bility. Attributiontheory posits that people are naive

1http://www.bloomberg.com/slideshow/2013-11-15/the-top-10-

reputation-crises-of-2013.html#slide2

2http://usa.chinadaily.com.cn/epaper/2013-04/03/content_16373

193.htm

3http://www.bloomberg.com/news/articles/2015-09-21/volks

wagen-drops-15-after-admitting-u-s-diesel-emissions-cheat

4http://www.chinadaily.com.cn/china/2008-09/24/content_705

3427.htm

psychologists who try to make sense of their envi-

ronments and search for causal explanations, espe-

cially when the events are negative and unexpected

(Weiner, 2006). Responsibility attribution is thus a

useful information cue for comprehending a crisis,

and research conrms that stakeholders make sim-

plied judgments based on such cues when they try

to make sense of a crisis (Bundy & Pfarrer, 2015;

Cho & Gower, 2006; Coombs, 2007; Coombs &

Holladay, 2004). While it has been postulated that

stakeholders’ response to a crisis should be a func-

tion of responsibility attribution (Coombs, 1995),

and possibly also its interaction with corporate rep-

utation (Bundy & Pfarrer, 2015), these effects have

received little empirical testing.

In this study, we follow the literature and argue

for the critical roles played by prior social per-

ceptions (e.g., corporate reputation) and situational

factors (e.g., responsibility attribution) in affecting

how key stakeholders respond to a corporate crisis.

We contribute to this literature by examining how

different dimensions of reputation— being known

and generalized favorability— and attribution of

crisis responsibility jointly affect rm’s nancial

performance at the onset of a corporate crisis. Our

ndings extend research on reputation and crisis

management in a number of ways.

First, while measurements of corporate rep-

utation often center on a single dimension of

corporate reputation, the literature calls for a richer

conceptualization and more empirical research on

the effects of “multiple reputations’ on various

stakeholders” perceptions (e.g., Lange et al., 2011;

Rhee & Valdez, 2009). Building on distinctions

made among the multiple dimensions of corporate

reputation (Lange et al., 2011), this study adds to

the scant literature that has studied more than one

dimension of reputation (e.g., Deephouse & Carter,

2005; Rindova et al., 2005). Especially at the onset

of a corporate crisis, stakeholders may have to

respond quickly with ambiguous and incomplete

information. Corporate reputation is arguably

one of the most critical information cues that

stakeholders may rely on to make sense of a crisis

(Bundy & Pfarrer, 2015; Rhee & Valdez, 2009).

Understanding the effect of different dimensions of

corporate reputation on rm value at the onset of a

crisis is thus of particular theoretical value.

Second, we contribute to the debate concern-

ing the effect of corporate reputation by evidenc-

ing opposing effects of its different dimensions on

rm value at the onset of a crisis (Pfarrer et al.,

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2103–2120 (2017)

DOI: 10.1002/smj