The Antecedents and Performance Implications of Reputation and Status

Contributed by: Peter W. Roberts

One important area of strategy research touches on the relationship between various intangible assets and firm performance (Hall 1993). These assets include managerial and organizational networks, organizational cultures, as well as perceptual assets like reputation and status. The aim of this session is to introduce the strategy research that examines these latter two types of assets as well as the related research found within the economics and sociology literatures.
Corporate reputations (Fombrun 1996) and organizational status (Podolny 2005) are important to strategy researchers given their documented theoretical and empirical links to firm behavior and performance. Lacking complete information about the quality of firms or their product and service offerings, consumers, employees, investors and other suppliers draw inferences based on firm features that are observable – like reputation and status. Thus, firms with better reputations or higher status tend to participate in more attractive upstream and downstream exchanges. At the same time, the processes that generate reputations and status orderings can lead to semi-permanent firm heterogeneity (Podolny and Phillips 1996; Roberts and Dowling 2002).

Early treatments of corporate reputation within the strategy literature build from game-theoretic accounts of competitors interactions and focus on a firm’s ‘reputation for toughness’ (Weigelt and Camerer 1988). More recently, attention has shifted to considering corporate reputation as an indicator of otherwise unobservable firm quality (Fombrun and Shanley 1990; Fombrun 1996). Reputations accumulate with prior firm actions and/or quality demonstrations (Shapiro 1983) to form one such quality indicator. As such, good reputations are now known to confer both survival (Rao 1994) and long-term financial performance (Roberts and Dowling 2002) benefits for the firms that possess them.

Since at least Merton (1968), we have also known that the social structure of fields or markets influences the returns that individuals and organizations receive for their quality demonstrations. Extending this basic insight, Podolny’s (2001) discussion of networks as pipes and prisms shows how visible associations with prominent others generates another quality signal that helps reduce alter-centric uncertainty. Bridging to strategy research, we now appreciate that firms with higher status are advantaged in ways that lead to improved performance (Podolny 1993, 1994). This has been documented in the case of new entrepreneurial ventures (Stuart et al. 1999) and in the context of pricing dynamics within product markets (Benjamin and Podolny 1999).

Specific Issues in the Search for Deeper Understandings

In thinking about the financial performance implications of these two intangible assets, it is important to pay attention to the specific definitions of reputation and status that we invoke. For the most part, economists tend to focus on reputation while sociologists pay more attention to status. Therefore, it is tempting to simply think of the former (latter) as an economic (sociological) construct. This is the approach taken by Washington and Zajac (2005) in their discussion of reputation and status in the context of college sports. However, this is probably an over-simplification and it seems preferable to think of reputation as accumulating with a firm’s own previous performance outcomes and other prior demonstrations. When stakeholders do not have ready access to this indicator, they may then draw their inferences from the even more indirect status-based indicator. This is the approach advocated by Podolny (2005).

With clearer definitions, we are better able to isolate and explicate the mechanisms that link reputation and status to firm performance. Decent examples of this are found in Podolny’s (1993; 1994) explication of his status-based model of market competition and in Roberts and Dowling’s (2002) elaboration of the link between corporate reputation and long-term financial performance. More generally, it is important to pay attention to the assumptions that are made about what information is available to the various market participants. Good examples of this practice are found in papers that stress the importance of alter-centric uncertainty for the expectation of signaling effects from producer status (Stuart 2000; Podolny 2001). This is also handled nicely in papers that might be considered a bit “further afield” for strategy researchers, including Landon and Smith’s (1997) analysis of individual and collective reputation in Bordeaux wine markets and Gorton’s (1996) analysis of reputation formation in early bank note markets in the United States.

By more carefully defining terms and specifying causal mechanisms, we have an enhanced capacity to move past expecting simple and unwavering positive performance effects for better reputations or higher status. An excellent example of this kind of progress is found in Phillips and Zuckerman’s (2001) elaboration of middle status conformity theory. Based on specific assumptions about the performance implications of risky behavior for high, middle and low-status firms, they help us to understand why high and low status firms are more likely than middle status firms to engage in less legitimate business practices. Another recent study offers a possible boundary condition for the reputation-performance relationship by asking when favorable reputations might actually be harmful to the firms that possess them. This is the claim made and then supported by Rhee and Haunschild (2006) in their analysis of reputation and product recalls in the automobile industry.