Firm reputation, risk, and stock return

Abstract

Purpose: In recent years, corporate reputation has emerged as a driving force for efficient and productive business operations, effectively managing stakeholder behavior. According to signaling theory, corporate reputation signifies risk, with higher reputation levels indicating lower risk. Additionally, from a resource-based perspective, corporate reputation is a strategic asset and a valuable resource, leading to sustainable performance and competitive advantage. Consequently, corporate reputation is an intangible asset that accumulates over time, potentially generating value and wealth for the company while enhancing its performance. This study examines corporate reputation's impact on various dimensions of risk, including total company risk, systematic risk, financial distress risk, and stock returns.

Methodology: The study tests its hypotheses using data from 156 companies listed on the Tehran Stock Exchange over 11 years from 2013 to 2024. Corporate reputation was measured through principal component analysis and supplemented by the Industrial Management Organization rankings. Regression models were fitted using a dynamic panel approach and the generalized method of moments estimator.

Findings: Statistical testing of the research hypotheses revealed several vital results. First, using both reputation measures, a significant and direct relationship exists between corporate reputation and total risk. Second, a negative and significant relationship was found between corporate reputation and systematic risk. Third, a negative and significant association was identified between corporate reputation and financial distress risk when reputation was defined based on principal component analysis. Fourth, a positive and significant relationship was observed between corporate reputation and excess stock returns across both definitions of reputation.

Conclusion: Corporate reputation shapes companies' strategic responses to environmental threats. A high corporate reputation within a competitive landscape is critical for business success. Reputable companies generally enjoy easier and more cost-effective access to financial resources, which can help alleviate financial and investment constraints during financial stress. Consequently, these companies will likely face lower financial distress risks and deliver superior performance to stakeholders. However, the impact of corporate reputation goes beyond financial performance. High-reputation firms attract greater attention from shareholders, leading to enhanced financial stability and reduced risk. This research offers theoretical and practical insights for policymakers within the stock exchange and shareholders alike. The findings support policymakers in recognizing the importance of corporate reputation and ranking systems. Additionally, these results may assist shareholders in making effective investment decisions and contribute to expanding and developing empirical research foundations in corporate reputation.

Conclusion: Corporate reputation shapes companies' strategic responses to environmental threats. A high corporate reputation within a competitive landscape is critical for business success. Reputable companies generally enjoy easier and more cost-effective access to financial resources, which can help alleviate financial and investment constraints during financial stress. Consequently, these companies will likely face lower financial distress risks and deliver superior performance to stakeholders. However, the impact of corporate reputation goes beyond financial performance. High-reputation firms attract greater attention from shareholders, leading to enhanced financial stability and reduced risk. This research offers theoretical and practical insights for policymakers within the stock exchange and shareholders alike. The findings support policymakers in recognizing the importance of corporate reputation and ranking systems. Additionally, these results may assist shareholders in making effective investment decisions and contribute to expanding and developing empirical research foundations in corporate reputation.