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Pfister, Benjamin (2014): Corporate Reputation and the Cost of Equity Capital - An Empirical Analysis of German DAX30 Companies. 2014 Global Marketing Conference at Singapore, Singapore, 2014. Global Alliance of Marketing & Management Associations (ed.) , In: Proceedings of the 2014 Global Marketing Conference at Singapore, pp. 1362-1363

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In recent years, the exploration of the quantifiable effects of market-based intangible assets on firm performance has become increasingly important in marketing and management literature. Corporate reputation, considered as a one of the key marketing metrics for maintaining and enhancing companies’ competitiveness in the globalized economy, plays an essential part in this context. Numerous studies show the impact of reputation on measures of financial performance, justifying companies’ endeavors to install and dedicate effort towards systematic reputation management and tracking. A possible consequence of a good reputation that has so far been neglected in academic research is a decrease in a company’s cost of equity capital, a measure that constitutes an important basis for the decision to invest in future projects, thus playing a vital part in the creation and preservation of strategic competitive advantages. A firm’s cost of equity is defined as the required rate of return, given the market’s perception of the firm’s riskiness. It is based on investors’ expectations about future returns and estimated by means of residual income models with varying assumptions and restrictions (in this study: Claus and Thomas 200, Gebhardt et al. 2001, Ohlson and Juettner-Nauroth 2005, and Easton 2004), equating the current stock price to future cash flows that are discounted with the firm’s implied cost of equity. To account for industry-specific idiosyncrasies, each firm’s cost of equity is adjusted by the monthly industry median. Corporate reputation is defined as an attitudinal mindset towards a company. Following the model of Schwaiger (2004), it is conceptualized as a two-dimensional construct comprising a cognitive (competence) and an affective (likeability) component; reputation is the linear combination of these two dimensions. Corporate reputation data was collected in 13 semi-annual waves from large-scale samples representing the general public in Germany. By applying panel data analysis on a set of the 30 largest publicly listed German companies during a seven-year time-span (2005-2011) and controlling for commonly known factors, I show that corporate reputation significantly reduces a firm’s cost of equity. This relationship holds when reputation is corrected for prior financial performance and industry affiliation. My results should help managers to further strengthen their argument that reputation management is value-relevant. This study should be seen as a starting point for further research to gain a deeper understanding of the reputation-cost of capital-interface.

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