Reputation as Reservoir: Buffering Against Loss in Times of Economic Crisis

Abstract

The premise of this study is that a good reputation serves as an intangible asset which can help protect the organization in times of corporate crisis — in public-relations terms, the 'reservoir of goodwill' presumption. Using data from the stock market crashes in 1987 and 1989, this study examined whether companies with better reputations, as measured by Fortune's annual ratings of America's largest corporations, suffered less severe declines in market value. Results show no significant difference between companies with higher and lower reputations in 1987, when the market dropped over 20 per cent in one day. During this crisis, there was a high volume of automated computer trading and a great deal of investor panic which may have precluded rational investment decision making. In 1989, however, when the market took a less severe sudden, unexpected downturn, the stock prices of companies with better reputations dropped significantly less than those of companies not favored with such positive standing. This supports the hypothesis that good corporate reputations provide a reservoir of goodwill which buffers companies from market decline in times of uncertainty and economic turmoil (short of a panic), underscoring the importance of attentive reputation management.