Corporate Reputation and Stock Liquidity: the US case

Fabiana Domingos, Lígia Febra, Magali Costa

Abstract


Purpose: The purpose of this paper is to analyze if there is a positive relationship between corporate reputation communication through media ranking and stock liquidity.

Methodology: A model based on firms' financial market data was estimated, through a panel data analysis that included 18,444 observations, from a full sample of 348 firms listed on the New York Stock Exchange (NYSE), half of which were listed in the 2015 ranking of Fortune's World’s Most Admired Companies (WMAC).

Findings: The results show that there is a positive relationship between corporate reputation communication and the stocks liquidity, since firms listed in the Fortune Ranking have higher liquidity than firms that are not listed, and firms classified with a high rank have higher liquidity than firms classified with a low rank.

Originality: Stock liquidity is important to obtain financing resources to invest in profitable projects that increase the firm value. On the other hand, it is recognized by the literature that corporate reputation has a strong influence on firm performance. To the best of our knowledge, this is the first study that addresses the analysis of the relationship between corporate reputation and stock liquidity. Therefore, this study may provide important insights into the firms’ management, for the investor’s decisions and the government policies. Capital markets react ever more to market stimuli, including investor and consumer perceptions, which may influence the stock trade level. The identification of additional drivers of a firm’s stock liquidity improves decision-making.

Keywords: Corporate Reputation, Liquidity, Amihud Illiquidity, Market Illiquidity.


Full Text:

PDF

References


Amihud, Y. (2002). Illiquidity and Stock Returns: cross-section and time-series effects. Journal of Financial Markets, 5, 31-56. https://doi.org/10.1016/S1386-4181(01)00024-6

Amihud, Y. and Mendelson H. (1986). Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, 17, 223-249. https://doi.org/10.1016/0304-405X(86)90065-6

Amihud, Y. and Mendelson H. (1991) Liquidity, asset prices and financial policy. Financial Analysts Journal, 47(6): 56-66.

Aspara, J. (2013). The role of product and brand perceptions in stock investing: effects on investment considerations, optimism and confidence. Journal of Behavioral Finance, 14 (3), 195-212.

Aula, P. (2011). Meshworked reputation: Publicists’ views on the reputational impacts of online communication. Public Relations Review, 37 (99), 28-36. doi:10.1016/j.pubrev.2010.09.008

Baker, M. and Stein, J. C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7(3): 271-299. https://doi.org/10.1016/j.finmar.2003.11.005

Barardehi, Y. H., Bernhardt, D., and Davies, R. J. (2019). Trade-time measures of liquidity. The Review of Financial Studies, 32(1), 126-179. https://doi.org/10.1093/rfs/hhy012

Barber, B. M. and Odean, T. (2008). All that glitters: the effect of attention and news on the buying behavior of individual and institutional investors. The Handbook of News Analytics in Finance, 21 (2), 173–210. DOI: 10.1093/rfs/hhm079

Barnett, M., Jermier, J. and Lafferty B. (2006). Corporate reputation: The definitional landscape. Corporate Reputation Review, 9 (1), 26-38. doi: 10.1057/palgrave.crr.1550012

Becker‐Blease, J. R., and Paul, D. L. (2006). Stock liquidity and investment opportunities: Evidence from index additions. Financial Management, 35(3), 35-51. https://doi.org/10.1111/j.1755-053X.2006.tb00146.x

Ben-Rephael, A., Kadan, O., and Wohl, A. (2015). The diminishing liquidity premium. Journal of Financial and Quantitative Analysis, 197-229. https://doi.org/10.1017/S0022109015000071

Benefield, J. D., and Hardin, W. G. (2015). Does Time-on-Market Measurement Matter?. The Journal of Real Estate Finance and Economics, 50(1), 52-73. https://doi.org/10.1007/s11146-013-9450-z

Bontis, N., Lorne B. and Serenko, A. (2007). The mediating effect of organizational reputation on customer loyalty and service recommendation in the banking industry. Management Decision, 45 (9), 1426-1445. http://dx.doi.org/10.1108/00251740710828681

Brennan, M. and Subrahmanyam, A. (1996). Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics, 41, 441-464.

https://doi.org/10.1016/0304-405X(95)00870-K

Cao, Y., Myers, L. A. and T. C. Omer. (2012). Does company reputation matter for financial reporting quality? Evidence from restatements. Contemporary Accounting Research, 29 (3), 956-990. doi:10.1111/j.1911-3846.2011.01137.x

Carmeli, A. and Tishler, A. (2005). Perceived Organizational Reputation and Organizational Performance: An Empirical Investigation of Industrial Enterprises. Corporate Reputation Review, 8 (1), 13–20. doi: 10.5897/AJBM12.1227

Chordia, T. and Swaminathan, B. (2000). Trading Volume and Cross-Autocorrelations in Stock Returns. The Journal of Finance, 55 (2), 913-935. https://doi.org/10.1111/0022-1082.00231

Chordia, T., Shivakumar, L. and Subrahmanyam, A. (2004). Liquidity Dynamics Across Small and Large Firms. Economic Notes, 33 (1), 111-143. https://doi.org/10.1111/j.0391-5026.2004.00127

Christensen, H. B., Hail, L., and Leuz, C. (2016). Capital-market effects of securities regulation: Prior conditions, implementation, and enforcement. Review of FinancialStudies, 29(11), 2885-2924. https://doi.org/10.1093/rfs/hhw055

Chun, R. (2005). Corporate reputation: Meaning and measurement. International Journal of Management Review, 7, 91-109. https://doi.org/10.1111/j.1468-2370.2005.00109.x

Coombs, T. and Holladay, S. (2006). Unpacking the halo effect: reputation and crisis management. Journal of Communication Management, 10 (2), 123-137 http://dx.doi.org/10.1108/13632540610664698

Datar, V. T., Naik, N. Y. and Radcliffe, R. (1998). Liquidity and Asset Returns: An Alternative Test. Journal of Financial Markets, 1, 203–19. https://doi.org/10.1016/S1386-4181(97)00004-9

Delgado-García, J., Quevedo-Puente, E. and Díez-Esteban, J. (2013). The Impact of Corporate Reputation on Firm Risk: A Panel Data Analysis of Spanish Quoted Firms. British Journal of Management, 24, 1-20. http://doi.org/10.1111/j.1467-8551.2011.00782.x

Dey, M. K., and Wang, C. (2012). Return spread and liquidity: evidence from Hong Kong ADRs. Research in international business and finance, 26(2), 164-180. https://doi.org/ 10.1016/j.ribaf.2011.10.002

Díaz, A., and Escribano, A. (2020). Measuring the multi-faceted dimension of liquidity in financial markets: A literature review. Research in International Business and Finance, 51, 101079. https://doi.org/ 10.1016/j.ribaf.2019.101079

Dowling, G. and Moran, P. (2012). Corporate reputations: Built in or bolted on?. California Management Review, 54 (2), 25–42. https://doi.org/10.1525/cmr.2012.54.2.25

Eckert, C.(2017). Corporate reputation and reputation risk. Journal of Risk Finance, 18 (2), 145-158. https://doi.org/10.1108/JRF-06-2016-0075

Flatt, S. J. and Kowalczyk, S. J. (2011). Corporate Reputation Persistence and Its Diminishing Returns. International Journal of Business and Social Science, 2 (19), 1.

Florackis, C., Gregoriou, A., and Kostakis, A. (2011). Trading frequency and asset pricing on the London Stock Exchange: Evidence from a new price impact ratio. Journal of Banking & Finance, 35 (12), 3335-3350. https://doi.org/10.1016/j.jbankfin.2011.05.014

Floreddu, P., Cabiddu, F. and Evaristo, R. (2014). Inside your social media ring: How to optimize online corporate reputation. Business Horizons, 54, 737-745. http://dx.doi.org/10.1016/j.bushor.2014.07.007

Fombrun, C. J., Gardberg, N. A. and Sever, J. M. (2000). The Reputation QuotientSM: A multi-stakeholder measure of corporate reputation. The Journal of Brand Management, 7 (4), 241-255. https://doi.org/10.1057/bm.2000.10

Fombrun, C. and Shanley, M. (1990). What’s in a Name? Reputation Building and Corporate Strategy. Academy of Management Journal, 33 (2), 233–258. http://doi.org/10.2307/256324

Fombrun, C. and Shanley, M. (2017). What's in a Name? Reputation Building and Corporate Strategy. Academy of Management Journal, 33 (2), 233-258. https://doi.org/10.5465/256324

Fombrun, C. and Van Riel, C. (1998). The reputational Landscape. Corporate Review, 1 (1), 1-16. https://doi.org/10.1057/palgrave.crr.1540008

Godfrey, P., Merril, C. and Hansen, J. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30 (4), 425-445. https://doi.org/10.1002/smj.750

Gregoriou, A., and Nguyen, N. D. (2010). Stock liquidity and investment opportunities: New evidence from FTSE 100 index deletions. Journal of International Financial Markets, Institutions and Money, 20(3), 267-274. https://doi.org/10.1016/j.intfin.2010.03.005

Hammond, S. and Slocum, J. (1996). The impact of prior firm financial performance on subsequent corporate reputation. Journal of Business Ethics, 15 (2), 159–165. https://doi.org/10.1007/BF00705584

Hua, J., Peng, L., Schwartz, R. A., and Alan, N. S. (2020). Resiliency and stock returns. The Review of Financial Studies, 33 (2), 747-782. https://doi.org/10.1093/rfs/hhz048

Kang, W., and Zhang, H. (2014). Measuring liquidity in emerging markets. Pacific-Basin Finance Journal, 27, 49-71. https://doi.org/10.1016/j.pacfin.2014.02.001

Koch, J. and Cebula, R. (1994). In Search of Excellent Management. Journal of Management Studies, 31 (5), 681-699. https://doi.org/10.1111/j.1467-6486.1994.tb00634.x

Le, H., and Gregoriou, A. (2020). How do you capture liquidity? A review of the literature on low‐frequency stock liquidity. Journal of Economic Surveys, 34(5), 1170- 1186. https://doi.org/ 10.1111/joes.12385

Levine, R. and Zervos, S. (1998) Banks, stock markets and economic growth. American Economic Review 37(3): 537–558.

Lin, Z., and Vandell, K. D. (2007). Illiquidity and pricing biases in the real estate market. Real Estate Economics, 35(3), 291-330. https://doi.org/10.1111/j.1540-6229.2007.00191.x

Mann, S.V. and Ramanlal, P. (1996). The Dealers’ Price/Size Quote Market Liquidity. Journal of Financial Research, 19 (2), 243-271. https://doi.org/10.1111/j.1475-6803.1996.tb00596.x

Naik, P., Poornima, B. G., and Reddy, Y. V. (2020). Measuring liquidity in Indian stock market: A dimensional perspective. PloS one, 15(9), e0238718. https://doi.org/10.1371/journal.pone.0238718

OuYang, Z., Xu, J., Wei, J. and Liu, Y. (2017). Information asymmetry and investor reaction to corporate crisis: Media Reputation as a Stock Market Signal. Journal of Media Economics, 30 (2), 82–95. https://doi.org/10.1080/08997764.2017.1364256

Pagano, M. (1989). Trading Volume and Asset Liquidity. The Quarterly Journal of Economics, 104 (2), 255–274. https://doi.org/0.2307/2937847

Peng, L. (2001). Trading takes time (No. ysm234). Yale School of Management.

Peterson, D. (2018). Enhancing corporate reputation through corporate philanthropy. Journal of Strategy and Management, 11(1), 18-32. https://doi.org/10.1108/JSMA-10-2016-0068

Pfarrer, M. D., Pollock, T. G. and Rindova, V. P. (2010). A tale of two assets: The effects of firm reputation and earnings surprises on investors’ reactions. Academy of Management Journal, 53, 1131–1152. https://doi.org/10.5465/amj.2010.54533222

Roberts, P. W. and Dowling, G. R. (2002). Corporate reputation and sustained superior financial performance. Strategic Management Journal, 23, 1077–93. https://doi.org/10.1002/smj.274

Rouwenhorst, K. G. (1999). Local return factors and turnover in emerging stock markets. Journal of finance (Wiley-Blackwell), 54(4), 1439-1464.

Sánchez, G. and Vega, M. (2018). Corporate reputation and firms' performance: Evidence from Spain. Corporate Social Responsibility and Environmental Management, 25 (6), 1231-1245. https://doi.org/10.1002/csr.1634

Tversky, A. and Kahneman, D. (1973). Availability: A heuristic for judging frequency and probability. Cognitive Psychology, 5 (2), 207-232. https://doi.org/10.1016/0010-0285(73)90033-9.

Veh, A., Göbel, M., and Vogel, R. (2019). Corporate reputation in management research: a review of the literature and assessment of the concept. Business Research, 12, 315–353. https://doi.org/10.1007/s40685-018-0080-4.

Velnampy, T. and Niresh, J. A. (2012). The Relationship between Capital Structure and Profitability. Global Journal of Management and Business Research, 12(13), 67-73. https://journalofbusiness.org/index.php/GJMBR/article/view/766

Vergin, R. and Qoronfleh, M. (1998). Corporate reputation and the stock market. Business Horizons, 41 (1), 19-26. https://doi.org/10.1016/S0007-6813(98)90060-X

Weigelt, K. and Camerer, C. (1988). Reputation and corporate strategy: A review of recent theory and applications. Strategic Management Journal, 9(5), 443–454. http://doi.org/10.1002/smj.4250090505

Žabkar, M. and Arslanagić-Kalajdži, M. (2013). The impact of corporate reputation and information sharing on value creation for organizational customers. South East European Journal of Economics and Business, 8(2), 42–52. doi: 10.2478/jeb-2013-0009




Copyright (c) 2022 European Journal of Applied Business and Management

 

European Journal of Applied Business and Management

ISSN: 2183-5594

DOI: https://doi.org/10.58869/EJABM

Indexing:

EBSCO | CROSSREF | GOOGLE SCHOLAR | LATINDEX | DRJI | ICI JOURNALS MASTER | REDIB | MIAR