Abstract
Abstract
Prolific research examining the impact of a good corporate reputation on financial performance has bestowed equivocal findings. Despite this inclusivity, corporate reputation continues to gain impeccable importance in sustaining superior performance. Corporate reputation has emerged as an important asset in emerging markets such as India, where firms are facing competition at the global level. An endeavor has been made through current study to re-examine the reputation–performance liaison in a different economic setting deploying a different measure of corporate reputation. Panel regression technique has been applied on top 500 Indian companies constituting Bombay Stock Exchange (BSE) 500 index to observe the impact of corporate reputation on subsequent financial performance during the period ranging from April 1, 2002 to March 31, 2012. The findings of the study reveal that past reputation (captured through listing age) has a significant positive impact on all three measures of financial performance (return on assets [ROA], return on equity [ROE], and asset turnover ratio [ATR]). Hence, the results are in line with previous studies that consider reputation as a strategic resource necessary to enhance firm performance. The study bears significant implications for corporate managers that they should manage the reputation of their organization effectively and use it as a strategic tool to gain competitive advantage.
Introduction
A nascent economy calls for bringing out something unique to demarcate itself from others. The laying of the red carpet for multinational corporations all over the world demands greater differentiation to survive the competition. The earlier focus was on acquiring and utilizing the tangible assets, and now greater impetus is given to the invisible intangibles (Hall, 1992). The relevance of intangibles in making up a successful corporate story can be inferred from the fact that approximately 75 percent of a company’s market value is determined by its intangible assets (Kaplan & Norton, 2006). A race has been instigated among corporate houses which accentuate more on intangible assets that are unique, rare, inimitable, and non-substitutable (Barney, 1991). Among many such assets such as goodwill, brand name, research and development (R&D), patents, and innovation (Blair & Kochan, 2002), corporate reputation is an imperative intangible.
Stakeholders nowadays have more concern about the ascendancy of the seller because they try to surmise “quality of the offering” from the “quality of offeror” believing that a reputed company will never offer something in the market which will tarnish its image. They have started interpreting various signals received from peers, media, and firm about the quality and reputation of the purveyor, much before they enter into a contract with them so that they are able to choose the best to deal with. Hence, it becomes indispensable on the part of the companies to send quality signals to the corporate audience so as they form a positive perception of the company. Reputation serves as an informative signal (Akerlof, 1970) and contract guarantor (Cornell & Shapiro, 1987), thereby implying it as an imperative tool for the organizations to survive the hot fire of competition.
The literature documents an upsurging quest for covert resources like corporate reputation which are expected to bring in a competitive advantage to firms (Barney, 1991). The recent paradigm shift from tangible to intangible assets for drawing explanation for superior performance of similar firms has necessitated a research into the relationship between corporate reputation and financial performance. The aim of the current study is to investigate whether good corporate reputation is associated with financial performance in emerging markets such as India, where reputation is being assigned greater impetus due to the increased level of global competition. Corporate reputation seems imperative for firms to gain competitive advantage. A good name brings many benefits in terms of greater employee satisfaction, lower labor turnover, high morale, greater customer satisfaction, repeated purchases by customers, willingness to pay price premiums (Eberl & Schwaiger, 2005; Schwaiger, 2004), lower negotiating, and transactional cost experienced by suppliers (Podolny, 1993) that ultimately improve financial performance.
Despite procuring concrete tangible benefits from this intangible asset, it has put the researchers all over the world in dismay as they are unable to capture this soft asset quantitatively. Most of the studies on corporate reputation have used survey method to measure it. The most extensively used measurement tool is the Fortune most admired companies list which is the ranking of world’s most admired companies by the CEO’s and financial experts and is perceptual. The ranking may vary as it is subjective in nature. Because of the limitations of this method, the foremost being that it is influenced by prior financial performance (Brown & Perry, 1994; Fryxell & Wang, 1994), efforts have been made to measure corporate reputation quantitatively. One such endeavor was made by Qu, Qu and Bin (2012) and Fontaine and Zhao (2013) who used firm’s listing age, that is, the number of months since the first appearance on the stock exchange as a proxy of firm reputation.
Visibility in the stock market can prove very useful for the company to build a good reputation (Mariconda & Lurati, 2014). Rhee and Haunschild (2006) pointed towards the importance of external visibility in building positive perceptions among stakeholder. Since listing on a stock exchange increases firm visibility and visibility is a measure of prominence and a crucial dimension of reputation (Van Den Bosch, De Jong, & Elving, 2005), it is expected to generate a favorable impression among the public. Higher visibility means higher public attention which connotes a company’s acceptance by stakeholder and a good image in their mind (Rindova, Pollock, & Hayward, 2006). Company with a long history of trading definitely generates more information for the audience (Barry & Brown, 1985; Jiang, Lee, & Zhang, 2005; Zhang, 2006). More information availability means lesser information asymmetry problem as more information gets evenly distributed between buyer and seller; the level of skepticism and uncertainty reduces, and such companies are looked up venerably. The number of years elapsed since companies first appearance on the stock exchange can be linked to better reputation. The current study tries to measure corporate reputation of Indian companies as the time elapsed since companies listing on Bombay Stock Exchange (BSE).
The present study endeavors to appraise the relevance of a good reputation in an emerging economy like India on the onset of globalization. With the opening of the doors for globalization in 1991, the Indian corporate sector has undergone tremendous reforms waking from their armor and piercing their protective wall to face global competition. An effort has been made to relate this success mantra with financial performance to ensure whether reputed Indian companies portray improved financial performance or not. Most of the empirical work capturing the relation between corporate reputation and financial performance (Alvarado-Vargas, 2013; Anderson & Smith, 2006; Eberl & Schwaiger, 2005; Hall & Lee, 2014; Lee & Roh, 2012; Raithel & Schwaiger, 2015; Roberts & Dowling, 2002; Stuebs & Sun, 2010; Wang & Berens, 2015) is in context of developed nations. The study is unique in the sense that it conducts reputation research in a different economic setting to examine the international robustness of findings of other nations (Brammer, Millington, & Pavelin, 2009). Very less research has been done in the context of emerging economies; hence, the current study is an attempt in this direction to fill this gap.
Literature Review and Hypothesis Development
Resources may be tangible or intangible and are imperative for a successful trot of business. Tangible resources include all the physical assets that find the place in the companies’ balance sheet (Andersen & Kheam, 1998), while the incorporeal resources comprise of covert resources that are not disclosed in the financial statements and are non-financial, non-tradable in the market (Galbreath, 2005). A companies’ higher market value over its book value is reflective of intangible resources being possessed by it (Hall, 1993). These intangible resources include intellectual capital, human capital (Hitt, Ireland, Camp, & Sexton, 2001), goodwill, brand name, R&D, patents, innovation (Blair & Kochan, 2002), and corporate reputation (Black, Carnes, & Richardson, 2000; Fombrun & Van Riel, 1997; Hall, 1992).
The relation between corporate reputation and financial performance has been well explored by researchers and academicians but to conclude inconsistent findings. Some studies have reported positive link between corporate reputation and subsequent financial performance (Alvarado-Vargas, 2013; Anderson & Smith, 2006; Eberl & Schwaiger, 2005; Hall & Lee, 2014; Lee & Roh, 2012; Raithel & Schwaiger, 2015; Roberts & Dowling, 2002; Stuebs & Sun, 2010; Wang & Berens, 2015), while others have failed to notice this link. For instance, Rose and Thomsen (2004) and Inglis, Morley and Sammut (2006) have not been able to find a conclusive evidence to support a positive link between corporate reputation and subsequent financial performance.
Evidence of a strong and significant positive impact of corporate reputation on financial performance in developed nations motivated researchers in other parts of the world to extricate the benefits of this new clandestine to success. The emerging economies could not remain aloof from the debate and controversy in the reputation–performance link. Researchers in fast-growing nations, such as China, India, and Turkey, took to resolve the paradox but in vain. The study of Zhang and Rezaee (2009) and Cordeiro (2000) confirmed a positive association between reputation and performance in the Chinese market and Indian market, respectively; however, Tomak (2014) discovered no link between the two in Turkey leaving the riddle disconcerted. The ambiguity between reputation and performance continues even in small nations like Poland where Blajer-Golebiewska (2014) could not establish a strong correlation. Nothing could be commented on the inscrutability persisting between the two even after prolific research across the world on this issue.
The reason for such incongruity in results could be attributed to cross-sectional nature of data, small sample size or usage of differing measures of reputation and financial performance. Majority research in the field of corporate reputation measures it through reputation ranking score published by Fortune magazine (Fortune most admired companies list). Similar kind of surveys are undertaken in other nations as well as that of Germany’s Manager Magazin rankings; RepuTex ratings produced by Australian private company; Harris–Fombrun Reputation Quotient (RQ); Britain’s Most Admired Companies (Schwaiger, 2004); Marco Index of 100 most reputable firms in Spain (Delgado-Garcia, Quevedo-Puente, & Diez-Esteban, 2013); Chinese corporate credibility index-EORI (Economic Observer Research Institute) (Zhang & Rezaee, 2009). These qualitative techniques of measuring corporate reputation have often been criticized on grounds of (a) lack of comprehensiveness as these methods do not incorporate opinions of other stakeholder groups (Fombrun, 1996; Fryxell & Wang, 1994; Wood, 1995); (b) unfit for scientific research (Deephouse, 2000); (c) biased, attributed to the presence of financial halo (Brown & Perry, 1994); and (d) limited applicability. There is a dearth of studies that measured corporate reputation by a technique other than survey method. This study is an attempt to capture reputation of Indian companies using listing age as a proxy.
The theoretical underpinning, however, insinuates a direct liaison between corporate reputation and financial performance but the ambiguity offered in the empirical research inspires the scholars all over the world to fathom a unanimous link up. Resource-based theory and signaling theory endorse a positive association between corporate reputation and financial performance. When viewed through resource-based lens, reputation is discerned as an intangible, valuable, non-substitutable, inimitable, and unique resource possessed by the firm that makes the replica by competing firms strenuous, making the reputed perform better than others combating for it (Barney, 1991). A good name in the market fetches many benefits in the form of reduced costs of negotiations and improved sales due to repurchases by customers (Podolny, 1993). Thus, a good reputation is expected to improve the financial performance of companies.
The existence of information lag between the buyers and sellers has resulted into sending quality signals by the sellers to reduce uncertainty in the minds of stakeholders and to ease their decision. Public decisions are based on various signals that they receive from companies. Spence (1973) posits that signals mitigate information asymmetry problem. Reputation acts as a clue to the underlying quality of the offer and stakeholders feel confident in interacting with such companies that manifests into better performance. These arguments support a positive link between corporate reputation and financial performance giving way to the formation of the following hypothesis.
H1: There is a positive impact of corporate reputation on subsequent financial performance.
Research Methodology and Data Collection
In order to examine the impact of corporate reputation on financial performance, top 500 Indian companies constituting BSE 500 index have been analyzed, which represent all major industries of the economy. Accord Fintech private limited provides access to financial and non-financial information of Indian companies through ACE equity database, which has been used as a source to extract financial information. The study relates to 10-year period from April 1, 2002 to March 31, 2012, where the effect of lagged corporate reputation on subsequent financial performance is appraised. Due to unavailability of data, the sample got reduced to 409 companies. The variables for the current study have been categorized into three sub-headings:
Dependent Variable
Financial performance of BSE 500 companies is taken as dependent variable. Return on assets (ROA), return on equity (ROE), and asset turnover ratio (ATR) are taken as measures of financial performance. Different studies have used different measures of financial performance. Some authors have used market-based measures of financial performance to capture the link between corporate reputation and financial performance (Raithel & Schwaiger, 2015), while others have used accounting-based measures (Hall & Lee, 2014; Roberts & Dowling, 2002; Tomak, 2014), whereas few deployed a combination of these measures (Hammond & Slocum, 1996; Lee & Roh, 2012). This study uses the accounting-based measure to capture financial performance.
Independent Variable
The aim of the study is to decipher the impact of corporate reputation on subsequent financial performance; hence, corporate reputation is taken as an independent variable. The time elapsed since companies’ first appearance on BSE is ascertained from its listing date that is extracted for each company from BSE website. 1
See www.bseindia.com
Control Variables
To explicitly discern the impact of corporate reputation on financial performance, certain control variables are introduced in the model. The empirical literature examining corporate reputation and financial performance suggest taking total assets as a proxy for firm size (Inglis et al., 2006); current ratio, proxy for liquidity (Hall & Lee, 2014) and debt-equity ratio, proxy for leverage (Delgado-Garcia et al., 2013; Lee & Roh, 2012; Wang & Berens, 2015) as control variables. Large-sized firms reap economic advantages by conducting operations on a wider scale (Fiegenbaum & Karnani, 1991). It is expected that firm size will influence firm performance positively. To account for this total asset (a proxy of firm size) is introduced as a control variable. Liquidity and performance are expected to correlate positively (Hall & Lee, 2014). High-levered firm attracts compulsory interest obligations, which accounts for a negative impact on financial performance (Pandey, 2008).
Description of Variables Used in the Study
Panel regression technique seems to be the most appropriate tool to analyze the cause and effect relation incorporating both time and cross-sectional dimensions. Adherence to various assumptions of panel regression is assured to obtain unbiased and fair results. In order to resolve the issue of heteroscedasticity and autocorrelation, cluster[i] command is used. The results reported in the current study are that of GLS random effects model as it seems more efficient than fixed effects while dealing with the data containing dummy variables. The model so being analyzed can be represented through following equations.
ROA = αit + β1 Debt-Equity Ratio
it
+ β2 Current Ratio
it
+ β3 Total Assets
it
+ β4 Board Size
it
+ β5 Institutional ownership
it
+ β6 Corporate Reputation (−1)
it
+ β7 Financial Performance (−1)
it
+ time dummy 2008–2009 + time dummy 2009–2012. ROE = αit + β1 Debt-Equity Ratio
it
+ β2 Current Ratio
it
+ β3 Total Assets
it
+ β4 Board Sizeit + β5 Institutional ownership
it
+ β6 Corporate Reputation (−2)
it
+ β7 Financial Performance (−1)
it
+ time dummy 2008–2009 + time dummy 2009–2012. ATR = αit + β1 Debt-Equity Ratio
it
+ β2 Current Ratio
it
+ β3 Total Assets
it
+ β4 Board Size
it
+ β5 Institutional ownershipit + β6 Corporate Reputation (−1)
it
+ β7 Financial Performance (−1)
it
+ time dummy 2008–2009 + time dummy 2009–2012.
Empirical Results
Descriptive Statistics and Correlation Analysis
Corporate reputation correlated positively with all the measures of financial performance. The correlation coefficient of corporate reputation with ROA is 0.05 (p-value 0.00 < 0.01), with ROE is 0.04 (p-value 0.02 < 0.05), and ATR is 0.112 (p-value 0.00 < 0.01), which provides ostensible support to the hypothesis that there exists positive relation between corporate reputation and financial performance. The results also point toward the existence of a significant negative correlation between current ratio and financial performance (p-value 0.00 < 0.01), which is line with “liquidity/rate of return” dilemma as documented by Garanina and Petrova (2015). They suggested that some internal changes within a firm may deploy the resources to more vibrant opportunities which results in low current ratio with high financial performance.
Panel Regression Results Analyzing the Effect of Corporate Reputation (log of listing age as proxy) on Varied Measures of Financial Performance (ROA, ROE, and ATR)
The findings reveal that good reputation in the past affects financial performance positively (p-value 0.00 < 0.01). It indicates that a company having a good track record on stock exchange builds a rapport in the market and the company is perceived positively by stakeholders that improve its financial outcomes (Van Den Bosch et al., 2005). Firm size exhibits significant negative impact on financial performance (p-value 0.008 < 0.01) supporting an alternative theory of firm which states that as the firm size increases, managers become self-centered and try squandering firm resources for their own interests snubbing the main aim of wealth maximization (Pervan & Visic, 2012). Current ratio, board size and institutional shareholding drive financial performance in reverse direction but the impact deciphered is insignificant. A high-levered firm faces problems with respect to maintenance of sufficient funds because of compulsory interest obligations to be met, which causes a negative link between debt-equity ratio and financial performance (Pandey, 2008). The findings are consistent with this argument (p-value 0.009 < 0.01). Past performance of a company is found to be an important determinant of current financial performance (p-value 0.00 < 0.01). It is observed that the financial crisis (captured through dummy variable 2008–2009) had a significant negative impact on financial performance of Indian companies (p-value 0.00 < 0.01). Even the post-crisis period (captured through dummy variable 2009–2012) indicates the significant negative impact on financial performance of Indian companies (p-value 0.00 < 0.01). The model explains 47 percent variation in financial performance where past reputation and past financial performance play a vital role in shaping current financial performance.
Literature point toward the existence of mixed results on the relationship between corporate reputation and financial performance due to use of differing measures of corporate reputation and financial performance (Hammond & Slocum, 1996). To account for this, panel regression was run using different accounting measure of financial performance to notice any change that occurs in the relation between corporate reputation and financial performance. The ROE was taken as dependent variable instead of ROA in Model 2. Model 2 reports similar results as exemplified in Model 1, where past reputation affects current financial performance positively (p-value 0.03 < 0.05). Reputation is discerned as an intangible, valuable, non-substitutable, inimitable, and unique resource possessed by the firm that makes replica by competing firms difficult, making the reputed firms perform better than others (Barney, 1991; Roberts & Dowling, 2002). A high current ratio drives financial performance in the negative direction (p-value 0.07 < 0.10) supporting “liquidity/rate of return” dilemma as documented by Garanina and Petrova (2015). Firm size, however, fails to generate a significant impact on performance. Debt-equity ratio, institutional shareholding, and board size influence financial performance positively, but the model failed to capture their impact significantly. Having access to resources in the past gives the power to grab on opportunities and improve the present performance (p-value 0.00 < 0.01). It is important to notice negative impact of financial crisis on financial performance (captured through ROE) of Indian companies (p-value 0.00 < 0.01). The disturbance caused due to the financial crisis in 2008–2009 continued even in the post-crisis period (captured through dummy variable 2009–2012), as the results reveal the significant negative impact on financial performance of Indian companies (p-value 0.00 < 0.01). Overall past reputation and other variables explain 71 percent changes occurring in current performance.
The impact of corporate reputation on ATR (a measure of financial performance) is discerned in Model 3, which reveals a similar association with financial performance as in Models 1 and 2. The impact of past corporate reputation on financial performance is found to be positive and significant (p-value 0.00 < 0.01). The findings of study are wholly consistent with previous research examining the role of good reputation in enhancing financial performance in developed nations (Anderson & Smith, 2006; Hall & Lee, 2014; Lee & Roh, 2012; Raithel & Schwaiger, 2015; Roberts & Dowling, 2002; Wang & Berens, 2015). Board size does not contribute significantly to the variations in financial performance. Debt-equity ratio corroborates negative relation with financial performance (p-value 0.00 < 0.01). Maintaining a low level of current ratio resulted in higher firm performance (p-value 0.02 < 0.05) due to the use of liquid resources in more profitable and vibrant growth opportunities going on within the firm (Garanina & Petrova, 2015). Size of the firm maintains its inverse relation with financial performance significant at 1 percent (p-value 0.01). Good performance in the past has a positive influence on current financial performance (p-value 0.00 < 0.01). The negative relation between institutional shareholding and financial performance is found to be significant at 1 percent level (p-value 0.00 < 0.01). This observation is consistent with the theory that managers tend to develop a special relation with the dominant institutional owners, who profligate the organizational resources, thereby financial figures dwindle when institutional owners indulge in selfish activities by joining hands with managers (Chen, Blenman, & Chen, 2008). It is observed that financial crisis had a significant negative impact on financial performance (captured through ATR) of Indian companies (p-value 0.00 < 0.01). Even the post-crisis period (captured through dummy variable 2009–2012) indicates the significant negative impact on financial performance of Indian companies (p-value 0.00 < 0.01). The model explains 83 percent variation in current financial performance.
More than 2-year-lagged reputation failed to produce any effect on financial performance, which is in the line of thought that intangible assets like corporate reputation are difficult but not impossible to be replicated (Dierickx & Cool, 1989; Rumelt, 1987). The incorporeal resources possessed by a firm are difficult to be imitated in short run at least, but in the longer period, such resources become overt to competitors and hence their impact on improving firm-specific performance is not discernable. Overall the results indicate that past reputation has a positive and significant bearing on financial performance when listing age is used as a proxy for corporate reputation. It is a remarkable finding in the Indian context, which yields empirical support to Barney (2001) view, who posit through resource-based perspective that resources acquired in one period take time to generate an effect on the outcomes of the firm. Covert resources have an implication on tangible assets, but it takes time to make this impact noticeable as such resources do not show signs on overt outcomes immediately (which is epitomized through the lag effect of corporate reputation on financial performance).
Conclusion
The main aim of the current study is to scrutinize the impact of corporate reputation on financial performance in India by undertaking an empirical analysis of BSE 500 companies. The key finding of the study is that being reputable yields better financial outcomes. The results indicate that corporate reputation of Indian companies generates a significant positive influence on subsequent financial performance. Incorporeal resources like a good corporate reputation make their presence known through their value-enhancing potential (Srivastava, Mcinish, Wood, & Capraro, 1997). A good name and market standing brings in super profits and helps companies survive the market crisis without undergoing financial crunch (Jones, Jones, & Little, 2000). Hence, Indian managers must manage and convey their reputation to the stakeholders to stimulate financial results in a positive direction
Reputation is a unique resource possessed by companies which demarcate them from their competitors and hence improves their profitability position as per resource dependency theory (Barney, 1991). The findings point toward the revalidation of signaling theory in the Indian context as stakeholders take the clue from the signals sent by companies before dealing with them, and companies sending cue of a good image to the public are rewarded through improved outcomes and lowered costs (Turban & Greening, 1997). Developed countries are already managing this asset and attaining financial growth. Now, it is the time for the managers of developing economies like India to bequeath the stakeholders with this wonderful tool of analysis to make informed decisions about the credentials of a body corporate.
However, the study is not without limitations. The influence of prior corporate reputation on subsequent financial performance was examined. Future research might explore the bidirectional relation between corporate reputation and financial performance. The study undertook an exploration of the role of corporate reputation and financial performance of public listed companies only. The results may vary for the private domain. Moreover, inclusion of more variables for the purpose of analysis could be incorporated in future research. Despite prolific research into the arena of corporate reputation, there exists no one standard measure to quantify it. Hence, the results might vary subject to change in the measurement technique of corporate reputation.