Corporate Reputation and Bankruptcy Risk.
| Autor | Gois, Alan Diogenes |
Introduction
Relentless competition, market globalization, and an ever-increasing supply of products and services induce firms to strive to gain an edge over their peers (Castro & Lopez, 2006; Gotsi & Wilson, 2001). To do so, firms employ strategic resources, such as assets, skills, organizational processes, attributes, and information. Based on the Resource-Based View, these resources must be valuable, rare, inimitable, and non-substitutable to generate a competitive advantage (Barney, 1991).
Corporate reputation is an important and valuable strategic resource which can provide a competitive advantage and help attain and sustain superior financial performance (Inglis, Morley, & Sammut, 2006; Melo & Garrido-Morgado, 2012; Roberts & Dowling, 2002). It may be seen as an aggregation of stakeholder perceptions about the firm, developed over time, representing an important intangible asset (Barnett, Jermier, & Lafferty, 2006; Roberts & Dowling, 2002).
According to Feldman, Bahamonde, and Bellido (2014), corporate credibility--one of the benefits of a high reputation--attracts more and more investors as the firm's market value increases and risk decreases. Understanding the relationship between corporate reputation and risk is of utmost importance in view of the role reputation plays in strategic management (Henkel, 2009), with repercussions on performance and risk (Delgado-Garcia, Quevedo-Puente, & Diez-Esteban, 2013).
Investment in reputation helps reduce information asymmetry between managers, the market, and investors by providing stakeholders with information not contained in financial reports (Li, 2010) and thereby increasing confidence in company actions, policies, and strategies. As pointed out by Delgado-Garcia, Quevedo-Puente and Diez-Esteban (2013), because corporate reputation serves as an information signal of potential future firm behavior, its influence on corporate risk may be stronger in firms about which stakeholders have less complete information.
Risk may be seen as the interpretation of the level of uncertainty associated with a given event for which a return is expected (Eiser et al., 2012). Several types of risk are described in the literature: fluctuations in economic variables (stock prices, exchange rates, interest rates, commodity prices), risk of loss due to inadequate systems and controls, management failure and fraud, risk of non-compliance and/or default on contracts, and risk of failing legal support (Eiser et al., 2012; Linsley & Shrives, 2006; Rodriguez-Moreno & Pena, 2013). In Hull (2015), corporate risks are segregated into four groups: market risk, operational risk, credit risk, and legal risk. The present study focuses on credit risk, which estimates the likelihood of bankruptcy.
Credit risk is the risk of default on payment or debtor's non-compliance, potentially leading to bankruptcy. In other words, credit risk indicates a firm's propensity to fail, mostly due to inefficient resource management, based on accounting reports indicating corporate insolvency (Altman, 1968). In this context, reputation can ensure market prominence, attract new talent and customers, and provide better bargaining power with suppliers (Feldman, Bahamonde, & Bellido, 2014), giving firms a competitive advantage and making them less likely to fail (Casado, Yanez, & Pelaez, 2017). Firms with good reputation tend to be longevous, less susceptible to bankruptcy, and more resilient in times of crisis (Fombrun, Gardberg, & Barnett, 2000).
In view of the influence of corporate reputation on investors' choices and risk concerns (Cole, 2012), in this study we explore the relationship between corporate reputation and bankruptcy risk.
Our sample included 441 firms listed at least once on the Fortune ranking of the World's Most Admired Companies (WMAC) in the period 2005-2016. We used the overall score on the WMAC ranking as a proxy for reputation and quantified bankruptcy risk in Altman Z-scores (Zang, 2012). Accounting information for each year in the period was retrieved from the database Compustat Global.
Our study provides subsidies for informed decision making about future investments, whether conservative or hazardous, based on an understanding of the relationship between corporate reputation and bankruptcy risk. The results show that firms with high reputation have lower risk, suggesting that credibility associated with corporate reputation has a favorable influence on investor decision making. Thus, reputation may be considered complementary to accounting reports for the sake of investment analysis.
The present investigation is a contribution to the burgeoning literature on corporate reputation associated with accounting, despite reputation being classified as an intangible asset capable of generating competitive advantage. The study also contributes to the literature on bankruptcy risk by providing empirical evidence for how bankruptcy risk may be affected not only by corporate reputation, but also by macroeconomic factors, regulatory quality, and the rule of law in each country.
Theoretical Framework
The topic of corporate reputation has been explored by scholars of many different fields, including economics, strategy, marketing, organization theory, accounting, and sociology (Fombrun & Van Riel, 1997). However, the concept has still not been defined in universally accepted terms (Chun, 2005).
Barnett, Jermier and Lafferty (2006) identified three major clusters of meaning in the concept of corporate reputation: awareness, assessment, and asset. As for the first, reputation may be defined as an aggregation of perceptions of the organization among stakeholders and other observers, without making judgments. As for the second, reputation is the result of a judgment, estimate, evaluation, or gauge. Being judgmental in nature, it is akin to an opinion or belief and includes the attractiveness of the firm and the regard in which it is held. The third cluster refers to reputation as an intangible asset of real value. The authors point out that despite some overlap, the clusters are relatively distinct. Awareness does not imply an assessment, and assessment does not imply transformation into an asset. In the present study, reputation is considered an intangible asset.
Berens and Van Riel (2004) classified studies on reputation into three categories: social expectations, corporate personality, and trust. The first category includes studies associating reputation with social expectations regarding organizational behavior. The second category covers reputation as a set of personality traits attributed to companies. The third category includes studies associating reputation with trust, that is, the perception of honesty and trust in the firm. The present study may be classified in the third category.
In other words, corporate reputation may be seen as a strategic (thus intangible) asset with enough business value to confer a competitive advantage on the organization and attain superior performance, as long as the market trusts the firm's strategies (Fombrun & Van Riel, 1997). From the perspective of Recourse-Based View (RBV), in order to attain and sustain this level of performance, strategic assets must be valuable, rare, inimitable, and non-substitutable (Barney, 1991).
Other benefits of a good reputation associated with superior performance include willingness on part of consumers to pay more for the company's products and services, greater attractiveness for potential partners, and lower risk in the eyes of investors (Walker, 2010). Feldman et al. (2014) also point out that organizational credibility tends to attract more investors by increasing market value and reducing risk.
According to Fombrun and Shanley (1990), investors prefer firms with high performance and low risk due to their propitious trajectory and perspectives. Optimistic projections motivate investors to acquire stock, and this in turn increases the firm's market value and shows the firm is capable of fulfilling its economic and social goals (Cole, 2012).
Thus, corporate reputation serves as an indication of potential future behaviors and plays a role in risk assessment. Indeed, the negative impact of bankruptcy risk is greater when stakeholders are not given access to complete company information (Delgado-Garcia et al., 2013). Cole (2012) reiterates that investors' choices may depend on whether the company's reputation is high enough to allay their concerns about risks.
Herremans, Akathaporn, and McInnes (1993) investigated corporate reputation as a measure of social responsibility in relation to financial performance in the period 1982-1987. The Fortune 500 ranking, which takes social responsibility into account, was used as a proxy for reputation. Operating margin, net margin, return on assets (ROA), and return on equity (ROE) were used as performance indicators. In addition, the authors evaluated total risk and systematic risk. A strong correlation was found between good reputation (with emphasis on social responsibility) and high returns, and between good reputation and low total risk.
Hammond and Slocum (1996) published a similar study involving 149 firms from the Fortune (1993) ranking of America's Most Admired Companies for the years 1981 and 1986. They expressed reputation as attributes of social responsibility according to Fortune criteria and used market-based risk and return variables and accounting measures of return as performance indicators. The results for 1981 indicated that firms with low risk (expressed as [beta] coefficient) and high ROE enjoyed the highest reputation, associated with an image of high social responsibility.
To interpret these studies, the concept of risk and the types of risk employed in the analysis must be understood. According to Gupta (2014), no universally accepted definition exists. However, Hull (2015) sees risk as the interpretation of the level of uncertainty associated with an event...
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