Assessing the Impact of Corporate Reputation on Firms’ Cost of Debt

Pfister, Benjamin und Schwaiger, Manfred (2016): Assessing the Impact of Corporate Reputation on Firms’ Cost of Debt. An Empirical Study of German DAX 30 Companies. 2014 Academy of Marketing Science (AMS) World Marketing Congress, Lima, Peru, August 5 - 8, 2014. Groza, Mark D. und Ragland, Charles B. (Hrsg.): In: Marketing Challenges in a Turbulent Business Environment : Proceedings of the 2014 Academy of Marketing Science (AMS) World Marketing Congress, Cham: Springer. S. 45-46

Abstract

Corporate reputation is a key intangible asset for maintaining and enhancing companies’ competitiveness in the globalized economy. It has been shown that reputable firms enjoy high levels of other consumer mindset metrics, such as customer satisfaction and loyalty, benefit from higher income and return on assets, and outperform the market in terms of stock returns. Furthermore, a high level of reputation shields companies’ future firm value from harmful consequences of external shocks, such as economic crises. The notion that corporate reputation lowers companies’ cost of capital is commonly accepted in management practice, but, surprisingly, has to date received little attention in academic literature. This study strives to fill this research gap by answering the question whether a company can lower its cost of debt by means of reputation management.

Apart from disclosing financial performance indicators, companies try to convey an impression of financial health to creditors via alternative sources, such as auditor choice or analysts. Additionally, there is empirical evidence that intangible assets can serve companies in their efforts to build confidence among creditors that they will be able to service their debt in the future. These assets help accelerating and enhancing cash flows, thus lowering the latter’s volatility and vulnerability and increasing their residual value. We therefore expect lenders to reward reputable firms with more favorable credit conditions, i.e. lower cost of debt, defined as the interest rate on debt adjusted by the lender to compensate for known risks. Furthermore, we assume that firm size moderates this relationship, as large (i.e., highly visible) firms are under constant scrutiny from their stakeholders. Thus, they have a stronger incentive to engage in efforts shaping their reputation, such as corporate social engagement, as their actions will be noticed by a large community. This helps them to build a large and loyal customer base, which in turn leads to more stable cash flows, reducing the probability of bankruptcy and inability to service their debt. Besides, large firms possess more assets that act as securities in case of payment default. Therefore, lenders should be less reluctant to incorporate reputation into their credit decisions.

We operationalize the cost of debt as the so-called realized interest rate by dividing a firm’s annual interest expenses by its total debt. To account for industry-specific idiosyncrasies, each firm’s cost of debt is scaled by the annual industry median. Corporate reputation is defined as an attitudinal mindset towards the 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. In a longitudinal study, reputation data for DAX30 companies (an index comprising the 30 largest firms listed on the German stock exchange) was collected by a major market research agency in seven annual waves (2005–2011) from large-scale samples representing the general public in Germany. By applying panel data analysis on a dataset containing 140 firm-year observations and controlling for commonly known factors, we find that a good reputation results in lower future cost of debt, relative to the firm’s industry peers. This relationship holds when reputation is corrected for prior financial performance and industry affiliation, factors known to affect the general public’s perception of the company. Furthermore, as expected, we observe that the larger a firm is, the better it can exploit reputational advantages when it comes to raising debt capital. While our results should help marketing managers to further strengthen their argument that reputation management is value-relevant, this study serves as a starting point for further research to gain a deeper understanding of the reputation-cost of capital-interface.

• Dokumententyp: Konferenzbeitrag (Paper)
• Fakultät: Betriebswirtschaft > Institut für Marktorientierte Unternehmensführung
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• ISBN: 978-3-319-19428-8 ; 978-3-319-19427-1
• Ort: Cham
• Sprache: Englisch