The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1935-5181.htm

Investment returns from Reputation

investing
reputation investing: do good firms
provide good returns?
Kristine L. Beck and James Chong 109
Finance, Financial Planning and Insurance, California State University Northridge,
Northridge, California, USA, and Received 16 June 2021
Revised 27 August 2021
Bruce D. Niendorf Accepted 29 September 2021

Finance and Business Law, University of Wisconsin Oshkosh, Oshkosh,

Wisconsin, USA

Abstract
Purpose – This study aims to examine whether a good corporate reputation leads to superior investment
returns. Theory and empirics provide support for the idea that a good corporate reputation improves firm
value, but much of the previous research fails to consider the risk of the companies they study and relies only on
accounting measures of performance such as return on assets. A complete picture of the relationship between
corporate reputation and shareholder value should include risk-adjusted returns and correlation with
benchmark returns.
Design/methodology/approach – The Harris Poll Reputation Quotient (RQ), based on the reputations of the
100 most visible companies, suggests that companies with a “solid reputation” are more likely to be attractive
investments. The authors construct portfolios using deciles and the RQ categories, rebalancing annually as RQ
rankings are updated. Returns are adjusted for risk using Jensen’s alpha, the information ratio, the Sharpe ratio,
Modigliani and Modigliani’s M2 measure, and Muralidhar’s M3 measure.
Findings – The results indicate that choosing a portfolio based on the highest RQ-ranked firms does
outperform the market on a risk-adjusted basis, and that the relationship between rankings and time-weighted
returns is roughly monotonic. The authors also observe that corporate reputation is persistent, and that the
best and worst most-visible firms are more likely to be privately held.
Originality/value – This research adds to the literature by including both market-based return measures and
risk in the examination of the relationship between corporate reputation and financial performance.
Keywords Corporate reputation, Risk-adjusted returns, Harris Poll Reputation Quotient
Paper type Research paper

1. Introduction
Management and marketing research support the idea that a good corporate reputation
benefits shareholders by improving the value of the firm. For example, Goldring (2015)
argues that a firm’s strategic focus on building and maintaining a positive corporate
reputation will lead to a competitive advantage and improved business performance, while
Gatzert (2015) examines corporate reputations and finds that a good reputation leads to a
significant competitive advantage and better financial performance [1].
Much of the previous research on corporate reputation relies on accounting measures of
performance such as return on assets (ROA) to measure financial performance. Adig€ uzel
€
and Ozbay (2017), for example, measure the relationship between company reputation and
real activities management and use ROA to measure financial performance. They examine
manipulation of discretionary expenses, operating cash flows and production costs and
find that reputable firms are less likely to manipulate real activities to protect the firm
reputation. James et al. (2019) argue that it is difficult for customers to separate loyalty and American Journal of Business
Vol. 37 No. 3, 2022
satisfaction based on their finding that the relationship between overall value and both pp. 109-119
earnings per share (EPS), and ROA is stronger than the relationship between satisfaction © Emerald Publishing Limited
1935-5181
DOI 10.1108/AJB-06-2021-0070
AJB and EPS or ROA. Deephouse (2000) develops a measurement of media reputation and uses
37,3 company reputation as identified in Fortune to backtest his measurement. He concludes
that a favorable reputation is an intangible asset that increases firm performance, as
measured by ROA.
Although ROA is an important measure of profitability, Gentry and Shen (2010) provide
evidence that accounting profitability and market performance represent distinct dimensions
that have little empirical overlap, with the former a reflection of a company’s past
110 performance and the latter a reflection of a company’s future value as ascertained by the
stock market. In addition, Haskins and Simko (2017) find net income sensitive to choices made
by management. As such, to translate the information embedded in corporate reputation into
a profitable investment strategy, we employ market-based performance measures.
In addition to utilizing backward-looking accounting measures, studies using ROA to
measure financial performance suffer from a critical flaw in that they do not consider
company risk; shareholder value is a function of both risk and return. Studies that do not
include risk measures in their calculation of returns utilize incomplete measures of
performance by leaving out this important component. While two companies may have
similar returns, one may substantially outperform the other on a risk-adjusted basis if it
achieves its returns while imposing substantially less risk on firm shareholders. Many
accounting-oriented measures of return, such as ROA, ignore risk and would therefore
identify these two companies as having similar performance when, in fact, their risk-adjusted
performance, and investor valuations of the firms, might differ greatly.
Some previous research has attempted to consider risk in measures of company
performance. McGuire et al. (1990) use Fortune’s ratings to identify company image, ROA
and other accounting measures of returns, and measure risk and return with alpha (the
regression intercept, not Jensen’s alpha) and beta (systematic risk). They find high firm
image correlated with high financial performance, but do not find evidence that quality of
management or evaluations of firm quality are important in explaining or predicting
financial performance.
Eckert (2017) examines various measures of corporate reputation and finds that a firm’s
corporate reputation is increasingly important with regard to competitive advantage and
financial performance. As such, protecting corporate reputation is necessary to minimize risk.
Tetrault and Lvina (2019) explore socially responsible behaviors in this context and find that
changes in corporate social responsibility predict a change in corporate reputation [2]. In this
aspect, Gomez-Trujillo et al. (2020) report that 60.89% of companies utilize sustainability as
an antecedent of corporate reputation and that indeed “including both reputational
management and sustainability in the corporate strategy can be a potential source to create
value, protect against difficulties and liabilities, and maximize business survival.”
In a market-based approach, Krueger and Wrolstad (2007) employ standard deviation and
beta to measure risk but do not use risk-adjusted returns. They find that returns on portfolios
with top Harris Reputation Quotient (RQ) ratings outperform those with the lowest ratings on
both the announcement date and the following year, although their findings are not
statistically significant. They do find significantly lower risk in their portfolio of highest RQ
ranked firms. Krueger et al. (2010), in examining investment performance associated with
changes in corporate reputation measured by RQ, include risk-adjusted performance
measures such as standard deviation, beta, Sharpe, Treynor and Jensen’s alpha. They find
firm reputations are procyclical and that firms with improving reputations have less volatile
stock prices than firms with declining reputations during their sample period 1999–2007.
Although limited by timing issues generated by the RQ methodology, Kruger et al. (2010) also
suggest that good stock returns cause good reputation rather than good reputation causing
good stock returns as present in much previous research. They do not, however, test this
causality. In an updated study for the period 1999–2014, Kruger and Wrolstad (2016) employ
similar performance measures and conclude that past share price performance is unrelated to Reputation
company reputation, while reputation provides insight to future company performance. investing
Previous studies such as Porritt (2005) consider the effects of financial success on a firm’s
overall reputation; however, they utilize inadequate measures of company risk [3]. Feng et al.
(2017) find a positive relationship between corporate social responsibility and financial
performance, but measure risk using liabilities. A complete picture of the relationship
between corporate reputation and shareholder value should include consideration of risk-
adjusted returns and correlation with benchmark returns. We have not found previous 111
research that adequately examines the risk-adjusted returns of investment portfolios based
on company reputation.
In this study, we examine the efficacy of forming and rebalancing portfolios based on
corporate reputation using the annual Harris Poll RQ Report. The 2018 Harris Poll Summary
Report suggests that firms with a “solid reputation” are more likely to be attractive
investments. The Harris RQ was initially developed in 1999 to be an improvement on the
Fortune magazine “Most Admired Companies” (MAC) rankings. The Harris methodology
involves identifying the 100 most visible firms and ranks those firms on 20 attributes across
six dimensions: social responsibility, products and services, emotional appeal, vision and
leadership, financial performance and workplace environment.
In the remainder of this article, we shall first describe the data and portfolios used in
Section 2. This is followed by the methodology and results in Section 3, incorporating Jensen’s
alpha, the Sharpe ratio, the information ratio, Modigliani and Modigliani’s M2 measure, and
Muralidhar’s M3 measure. Finally, the paper concludes in Section 4.

2. Data
2.1 Harris Reputation Quotient ranking
The most often used measure of corporate reputation is the MAC rankings by Fortune
magazine (Filbeck and Preece, 2003; Dowling, 2016). Respondents of the survey are industry
experts, e.g. corporate executives, directors and analysts, who rate companies on eight
criteria, of which three are financial. As a result, there exists a financial “halo effect” (Brown
and Perry, 1994). Though the halo effect could be removed, the survey mainly captures the
past financial success of a company (Fryxell and Wang, 1994) as viewed by a very specific
group of people, while Harris RQ includes a set of diverse attributes (as mentioned in the
previous section) to account for the overall evaluation of various stakeholders such as
customers, employees and the public.
Sarstedt et al. (2013), in a rather in-depth examination of the statistical validities of
corporate reputation measures, evaluate and compare MAC, Harris RQ, customer-based
corporate reputation (Walsh and Beatty, 2007) and approaches by Schwaiger (2004) and Helm
(2005) in terms of their convergent validity, and criterion validity on outcomes such as
satisfaction, loyalty, word-of-mouth, trust, commitment and customers’ behavioral
intentions. Overall, all approaches have similar levels of convergent validity. However,
Harris RQ and the Schwaiger (2004) approach achieve considerably higher levels of criterion
validity and have similar statistical test outcomes, in what Sarstedt et al. (2013) deem as the
“most important criterion for decision-making purposes” since these outcomes influence
future cash flows of companies. MAC is ranked last in all but one of the six outcomes. Since
MAC and Harris RQ are the only publicly available rankings of the five measures considered,
and since Harris RQ is not biased to a specific group of stakeholders and provides reliable
results to a certain extent, we use the Harris RQ rather than MAC.
Our sample is comprised of all publicly traded firms in the Harris RQ ranking from 2015 to
2020. The RQ rankings are available through theharrispoll.com and are updated approximately
once a year. The Harris RQ list is published in late-March, except in 2020 when the survey was
AJB conducted twice, before and after the emergence of the COVID-19 pandemic. 2020 rankings
37,3 were released in late-June. Our sample period is, therefore, April 1, 2015 to July 1, 2020.
Although a longer sample period would be preferred, thus extending the studies by
Krueger et al. (2010; for the period 2000 to 2007) and Krueger and Wrolstad (2016; from 2000 to
2014), Nielson Holdings purchased Harris Interactive in 2014 and made changes to the
ratings, including expanding the list from 60 to 100 firms. The Stagwell Group purchased the
Harris RQ in 2017 but did not make material changes to the methodology.
112 The process of forming the sample involves collecting RQ rankings for the most visible/
reputable firms, then screening for public/private ownership and stock ticker. Of the firms
included in the 2015 through 2020 RQ rankings, 109 are publicly traded in the USA. Firms
that were merged or acquired during the sample period are analyzed under the new ticker
after the merger/acquisition. There is a risk of survivorship bias as firms are dropped or move
down the RQ rankings, although Sears Holdings Corporation was the only sample firm
delisted during the relevant period. Sears, now trading over-the-counter, moved from Poor
(2015–2018) to Very Poor (2019) on the RQ list. Survivorship bias from firms dropping though
the rankings is mitigated by firms moving up.

2.2 Reputation Quotient category and decile portfolios

Harris RQ defines reputation categories as Excellent, Very Good, Good, Fair, Poor, Very Poor
and Critical. Test portfolios are only constructed for the first five categories as there are very
few firms ranked Very Poor or Critical. To further examine the relationship between ranking
and risk-adjusted forward return, we also form decile portfolios; firms with the highest RQ
ranking are in the first decile portfolio.
After forming equally weighted portfolios using RQ categories and deciles, we rebalance
the portfolios on April 1 of each year based on changes in the RQ ranking [4]. Holding period
returns are calculated using closing prices on those dates. The S&P 500 Index is used as the
benchmark for all portfolios; it is well diversified and is the prevailing benchmark for market
returns. Forward returns are calculated monthly for RQ category portfolios, decile portfolios
and the benchmark to determine if corporate reputation would be an appropriate component
of an investment strategy.
Table 1 provides descriptive statistics for Harris category portfolios in Panel A and decile
portfolios in Panel B. All category and decile portfolios outperform the benchmark over this
period, which is likely a function of the recent unusual current market conditions. For the
category portfolios, mean monthly returns decrease monotonically, and standard deviations
are almost monotonic. Only the Fair category portfolio has less risk than expected. The decile
portfolios also outperform the benchmark, showing higher returns and lower risk; the mean
monthly return, median monthly return and standard deviation are roughly monotonic. Betas
are very low for both the category and decile portfolios, indicating very little systematic risk
for the portfolios.
Table 2 reveals two important characteristics of the portfolios: the movement of firms
between categories and the time-weighted forward returns for portfolios. A “buy” is the first
appearance of a firm in the portfolio, and a “sell” is generated when a firm moves up or down
to a different category or is dropped from the index. It is possible for a firm to be purchased
more than once during the sample period as the firms move in and out of portfolios based on
Harris RQ ranking changes.
Panel A in Table 2 shows firm movement in and out of the portfolios consistent with the size
of the portfolio. Panel B, based on deciles, shows more movement in the mid-range portfolios
and fewer “trades” in the highest and lowest decile portfolios. This is partially due to the
composition of public and private firms, e.g. Monsanto is ranked near the bottom of the 2020
Harris RQ list but is privately held and therefore not included in the Poor category portfolio. It
appears that the best and worst most-visible firms are more likely to be privately held.
 Average monthly Median monthly Standard
Reputation
N return return deviation Beta investing
Panel A: Harris Poll RQ category
Excellent (RQ at least 80) 18 1.34% 1.20% 4.91% 0.15
Very Good (75–79) 47 1.06% 1.35% 4.34% 0.20
Good (70–74) 40 0.63% 0.97% 4.44% 0.22
Fair (65–69) 30 0.44% 0.75% 2.61% 0.27
Poor (55–64) 20 0.26% 0.82% 6.13% 0.29 113
Benchmark: S&P 500 Index
0.58% 0.47% 13.10% 1.00
Panel B: Decile portfolios
Decile 1 14 1.52% 1.62% 4.48% 0.11
Decile 2 24 1.08% 1.09% 4.89% 0.21
Decile 3 24 1.12% 0.60% 3.62% 0.08
Decile 4 26 0.82% 1.18% 5.04% 0.27
Decile 5 25 0.43% 1.23% 5.16% 0.24
Decile 6 28 0.19% 0.27% 4.88% 0.25
Decile 7 27 0.54% 0.86% 5.24% 0.27 Table 1.
Decile 8 25 0.74% 0.92% 5.29% 0.25 Descriptive statistics
Decile 9 22 0.39% 0.96% 6.91% 0.30 for equally weighted
Decile 10 13
0.16% 0.59% 5.88% 0.28 portfolios rebalanced
Benchmark: S&P 500 Index
0.58% 0.47% 13.10% 1.00 annually from April 1,
Note(s): N is the number of publicly traded firms that contribute to portfolio returns during the sample period 2015 to July 1, 2020

Number of buys* Number of sells** Time-weighted forward returns

Panel A: Harris Poll RQ Category

Excellent (at least 80) 22 16 12.79%
Very Good (75–79) 70 42 13.05%
Good (70–74) 69 42 2.04%
Fair (65–69) 41 30 3.00%
Poor (55–64) 26 20 1.00%
Very Poor (50–54) 1 0
46.74%
Critical (<50) 2 1
2.44%
Benchmark: S&P 500 Index 9.42%
Panel B: Decile portfolios
Decile 1 21 13 15.29%
Decile 2 38 30 11.56%
Decile 3 38 30 10.40%
Decile 4 35 28 9.45%
Decile 5 41 34 4.91%
Decile 6 42 32
0.55%
Decile 7 40 31 3.47% Table 2.
Decile 8 36 29 8.98% Time-weighted
Decile 9 33 27 3.59% forward returns for
Decile 10 23 16
4.74% equally weighted
Benchmark: S&P 500 Index 9.42% portfolios rebalanced
Note(s): *Firms could be purchased more than once, e.g. 2015 buy, 2016 sell, 2017 buy; **not including those annually from April 1,
still in portfolio on July 1, 2020 2015 to July 1, 2020

Time-weighted forward returns in Table 2, Panel A are higher than the benchmark for only
the first two RQ categories. For the decile portfolios in Panel B, three portfolios outperform
the benchmark, while the fourth has roughly the same time-weighted forward return as the
benchmark. Decile 6’s poor performance is partially due to the COVID-19 pandemic hit to
AJB Southwest Airlines, and Decile 8 contained a few firms that did well, such as Target
37,3 Corporation.

3. Methodology and results

To study the relationship between firm reputation and risk-adjusted forward portfolio
returns, we form and rebalance equally weighted [5] portfolios based on RQ categories and
114 test whether the portfolios outperform the S&P500 benchmark. Since portfolios are formed
based only on RQ ranking, there is no need to measure manager market timing skills, worry
about portfolio manager behavior such as manipulation using leverage or changing risk,
manager risk-aversion or style differences. Our performance measures also do not need to
consider risk-taking and option-like behavior causing non-normal returns, or different fee
structures for mutual funds. Traditional risk-adjusted performance measures are, therefore,
appropriate rather than factor models.
To measure risk-adjusted forward returns, we utilize Jensen’s alpha, the Sharpe ratio, the
information ratio, Modigliani and Modigliani’s M2 measure, and Muralidhar’s M3 measure.
M2 allows levered portfolios, which adjust the level of portfolio risk to correspond to the risk
of the benchmark. M3 also allows leverage and corrects for differences in total risk and
correlation with the benchmark.

3.1 Jensen’s alpha

Jensen’s alpha is used to test the hypothesis that the portfolio returns exceed those of the
benchmark. If the null hypothesis is rejected, we can conclude the portfolio’s risk-
adjusted returns outperformed the benchmark. The efficacy of the portfolio is based
solely on the RQ ranking rather than on manager skill, so a Type I error is concluding the
RQ ranking is valuable when it is not, and a Type II error is concluding the RQ ranking is
worthless when it would be a good method of building a portfolio. Either error would be
costly.
Jensen’s alpha (Jensen, 1968) is a measure of the degree to which a stock’s risk-adjusted
average return exceeds the market return, given the firm’s level of market risk. A positive and
statistically significant Jensen’s alpha would, therefore, indicate superior performance since
the benchmark Jensen’s alpha is zero by definition. Jensen’s alpha is calculated by regressing
excess portfolio returns on excess benchmark returns:

ðrAt
rft Þ ¼ αA þ βA ðrMt
rft Þ þ εt (1)

where rAt is the return on the fund, rf is the risk-free rate (one-month Treasury bill), rM is the
return on the benchmark, βA is the market risk of the fund, εt is the regression error and αA is
the Jensen’s alpha or intercept from the regression.

3.2 Information ratio

The historical or ex-post information ratio is defined as:
.
IR ¼ rA
rM σ r
r  (2)
A M

where rA and rM are respectively the average portfolio return and average benchmark return,
and σ ðrA − rM Þ represents the standard deviation of the excess average return.
3.3 Sharpe ratio Reputation
The Sharpe ratio (Sharpe, 1966), a more specific information ratio, measures the excess return investing
over the market return relative to total volatility. The Sharpe ratio is defined as:
SR ¼ ðrAt
rft Þ=σ ; (3)

where σ is total risk. The Sharpe ratio does not apply when excess returns are not normally
distributed, but that concern is mitigated in this context as there are no manager 115
manipulation or efforts to change risk during the evaluation period.

3.4 M2
Modigliani and Modigliani (1997) suggest a risk-adjusted performance measure that adjusts
the risk of the portfolio to match the benchmark:
M2 or ðRAPA Þ ¼ drA þ ð1
dÞrf ; (4)

where d ¼ σ M =σ A, in which σ A and σ M are the standard deviation of the portfolio and the
benchmark, respectively. The M2 measure will have identical rankings with the Sharpe ratio;
both measure return scaled by risk.

3.5 M3
Muralidhar (2000) also considers the correlation with the benchmark portfolio. M3, the
correlation-adjusted portfolio (CAP), calculates the highest risk-adjusted return for a given
tracking error and level of risk, and is represented by:
rðCAPA Þ ¼ aðrA Þ þ bðrM Þ þ ð1
a
bÞðrf Þ (5)
rffiffiffiffiffiffiffiffiffiffiffiffiffiffi
ð1 − ρ2 Þ
where a ¼ σσMA ð1 − ρT;M
2 Þ
and b ¼ ρT;M − ðaÞ σσMA ρA;M are the weights calculated from the risk
A;M

of the fund, the correlation between the fund and the benchmark and the target correlation of
2
the fund with the benchmark, ρT;M ¼ 1 − TEðTargetÞ
2σ 2
. The M3 weights determine the optimal
M
proportion invested in the portfolio, the benchmark and the riskless asset. The target tracking
error is defined as the amount of acceptable tracking error, in this case 10%.
We calculate each performance measure for every RQ category and decile portfolio and
compare risk-adjusted returns to the benchmark. If higher-ranked RQ portfolios outperform
the benchmark and lower-ranked RQ portfolios, we can conclude that reputation-based
portfolio selection is valuable.

3.6 Findings
Table 3 provides the results of our risk-adjusted performance analysis. These results support
the conclusion that firms that do good provide superior returns for their shareholders. First,
the Excellent and Very Good portfolios (Panel A) as well as the top four decile portfolios
(Panel B) outperform the benchmark across all four risk-adjusted return measures. Second,
when using the Harris Poll rankings, the firms that rank Good, Fair and Poor provide risk-
adjusted returns of the same relative rank. Firms ranked Good provide risk-adjusted returns
that are somewhat below the S&P 500 Index benchmark, firms ranked fair provide risk-
adjusted returns that are further below the benchmark and the firms ranked Poor provide
risk-adjusted returns that are the furthest below the benchmark. Roughly, the same pattern is
evident in Panel B where the firms are broken into smaller (decile) groups. With only one
exception, Deciles 5–10 underperform the S&P 500 Index across all risk adjustment methods.
AJB N Jensen’s alpha Information ratio Sharpe and M2 M3
37,3
Panel A: Harris Poll RQ category
Excellent (at least 80) 18 1** 1* 1* 1*
Very Good (75–79) 47 2* 2* 2* 2*
Good (70–74) 40 4 4 4 4
Fair (65–69) 30 5 5 5 5
Poor (55–64) 20 6 6 6 6
116 Benchmark: S&P 500 Index 3 3 3 3
Panel B: Decile portfolios
Decile 1 14 1** 1* 1* 1*
Decile 2 24 2* 3* 3* 3*
Decile 3 24 3* 2* 2* 2*
Decile 4 26 4* 4* 4* 4*
Decile 5 25 9 9 9 9
Decile 6 28 10 10 10 10
Decile 7 27 7 7 8 7
Decile 8 25 6 6 6 5*
Decile 9 22 8 8 7 8
Table 3. Decile 10 13 11 11 11 11
Performance measure Benchmark: S&P 500 Index 5 5 5 6
rankings for equally Note(s): N is the number of publicly traded firms that appear in the portfolio at least once during the sample
weighted portfolios, period
rebalanced annually *Outperformed benchmark; **statistically significant

Finally, when risk is measured using Jensen’s alpha, the firms ranked Excellent by the Harris
Poll (Panel A), and the firms in the top decile (Panel B) provide risk-adjusted returns that
significantly outperform both the benchmark portfolio as well as all other RQ portfolios of
lower rank. Thus, the companies that are the best at doing good provide the best risk-adjusted
returns for their shareholders.
One potential caveat to these results exists regarding the effect of portfolio diversification.
In Panel A, the Very Good and Good portfolios are larger in size and therefore benefit more
from diversification than the smaller portfolio. All other things equal, this greater
diversification should lead to improved risk-adjusted returns in these portfolios relative to
the portfolios containing fewer companies and presumably greater systematic risk. Although
this may affect our results somewhat by increasing our potential for Type II error (concluding
RQ ranking is worthless when it would be a good method of building a portfolio), it does not
drive them. Despite this potential bias against the risk-adjusted performance of smaller
portfolios, the Excellent portfolio (consisting of 18 firms) still significantly outperforms the
Very Good portfolio (47 firms) and the Good portfolio (40 firms).

4. Conclusion
This study uses the annual Harris RQ ratings to examine the relationship between corporate
reputation and risk-adjusted investor returns. Although there is considerable research on
corporate reputation, previous studies have inadequately disentangled the effects of risk and
reputation on returns. Given that investors demand higher returns from higher risk
companies, it is critical to consider risk, and to the extent possible, allow for firm risk when
trying to identify the effects of reputation on return performance. Failing to do so could lead
to erroneous conclusions in at least two ways. First, if good firms tend to be higher risk, the
positive returns associated with good firms in previous studies may be investor
compensation for the risk investors are taking with those companies rather than the good
those companies do. Second, if good firms tend to be lower risk, previous studies may
understate the strength of any positive relationship between doing good and providing Reputation
superior investor returns. The four methods of risk-adjusting returns used in this study move investing
toward disentangling the effects of risk and reputation, leaving a cleaner measure of the
effects of doing good than in previous studies.
We find a positive relationship between firm reputation and risk-adjusted investor
returns. As groups, companies rated Excellent and Very Good in the Harris HQ Poll
outperform their benchmark S&P 500 Index on a risk-adjusted basis across all four
methods of risk-adjustment used in this study. We also observe that high/low corporate 117
reputation is persistent, and that the best and worst most-visible firms are more likely to be
privately held.
As the 2020 Harris RQ list was published in late-June 2020, in contrast to March, and that
2020 experienced unusual economic and market conditions due to the COVID-19 pandemic,
our results warrant some caution and further research. We recommend extending this
research to further examine the relationship between high/low reputations and private equity
as well as the serial correlation of corporate reputation. Another area of interest is the market
reaction to new rankings, but the length and timing of the Harris survey process would
complicate any event study window. An additional topic to pursue is the still open question of
causality between firm reputation and performance; previous studies have demonstrated
causal relationships in both directions. Finally, from a practical standpoint, choosing equities
for investment based on reputation measured by the Harris RQ ratings might only be an
effective strategy when considering firms that receive the highest two ratings. Future
research could investigate this point further.

Notes
1. Other examples include Brown (1997), Roberts and Dowling (2002), Cravens et al. (2003) and Rose and
Thomsen (2004).
2. Other examples include Jeffrey et al. (2019) and Jia et al. (2020).
3. Others examining effect of financial performance on corporate reputation: Fombrun and Shanley
(1990), Dunbar and Schwalbach (2000), Roberts and Dowling (2002), Rose and Thomsen (2004) and
Love and Kraatz (2009).
4. Portfolios were rebalanced on July 1st for 2020.
5. DeMiguel et al. (2009) find “that of the various optimizing models in the literature, there is no single
model that consistently delivers a Sharpe ratio or a CEQ [certainty-equivalent] return that is higher
than that of the 1/N portfolio.”

References
Adig€ €
uzel, H. and Ozbay, D. (2017), “Corporate reputation and real activities management, evidence
from an emerging economy”, Journal of Business and Economic Policy, Vol. 4 No. 1, pp. 77-89.
Brown, B. (1997), “How do reputations affect corporate performance?: stock market valuation of
reputation for corporate social performance”, Corporate Reputation Review, Vol. 1 No. 1, pp. 76-80.
Brown, B. and Perry, S. (1994), “Removing the financial performance halo from Fortune’s ‘most
admired companies’”, Academy of Management Journal, Vol. 37, pp. 1347-1359.
Cravens, K., Oliver, E.G. and Ramamoorti, S. (2003), “The reputation index: measuring and managing
corporate reputation”, European Management Journal, Vol. 21 No. 2, pp. 201-212.
Deephouse, D.L. (2000), “Media reputation as a strategic resource: an integration of mass communication
and resource-based theories”, Journal of Management, Vol. 26 No. 6, pp. 1091-1112.
AJB DeMiguel, V., Garlappi, L. and Uppal, R. (2009), “Optimal versus naive diversification: how inefficient
is the 1/N portfolio strategy?”, The Review of Financial Studies, Vol. 22 No. 9, pp. 1915-1953.
37,3
Dowling, G.R. (2016), “Defining and measuring corporate reputations”, European Management Review,
Vol. 13 No. 3, pp. 207-223.
Dunbar, R.L.M. and Schwalbach, J. (2000), “Corporate reputation and performance in Germany”,
Corporate Reputation Review, Vol. 3 No. 2, pp. 115-123.
118 Eckert, C. (2017), “Corporate reputation and reputation risk: definition and measurement from a (risk)
management perspective”, Journal of Risk Finance, Vol. 18 No. 2, pp. 145-158.
Feng, M., Wang, X. and Kreuze, I.G. (2017), “Corporate social responsibility and firm financial
performance: comparison analyses across industries and CSR categories”, American Journal of
Business, Vol. 32 Nos 3-4, pp. 103-133.
Filbeck, G. and Preece, D. (2003), “Fortune’s best 100 companies to work for in America: do they work
for shareholders?”, Journal of Business Finance and Accounting, Vol. 30 No. 56, pp. 771-797.
Fombrun, C. and Shanley, M. (1990), “What’s in a name? Reputation building and corporate strategy”,
Academy of Management Journal, Vol. 33 No. 2, pp. 233-258.
Fryxell, G.E. and Wang, J. (1994), “The Fortune corporate ‘reputation’ index: reputation for what?”,
Journal of Management, Vol. 20 No. 1, pp. 1-14.
Gatzert, N. (2015), “The impact of corporate reputation and reputation damaging events on financial
performance: empirical evidence from the literature”, European Management Journal, Vol. 33
No. 6, pp. 485-499.
Gentry, R.J. and Shen, W. (2010), “The relationship between accounting and market measures of firm
financial performance: how strong is it?”, Journal of Managerial Issues, Vol. 22 No. 4,
pp. 514-530.
Goldring, D. (2015), “Reputation orientation: improving marketing performance through corporate
reputation building”, Marketing Intelligence and Planning, Vol. 33 No. 5, pp. 784-803.
Gomez-Trujillo, A.M., Velez-Ocampo, J. and Gonzalez-Perez, M.A. (2020), “A literature review on the
causality between sustainability and corporate reputation: what goes first?”, Management of
Environmental Quality, Vol. 31 No. 2, pp. 406-430.
Haskins, M.E. and Simko, P.J. (2017), “Net income’s bandwidth: an examination of earnings-based
performance metrics”, Journal of Managerial Issues, Vol. 29 No. 2, pp. 211-234.
Helm, S. (2005), “Designing a formative measure for corporate reputation”, Corporate Reputation
Review, Vol. 8 No. 2, pp. 95-109.
James, K.W., James, H., Babin, B.J. and Parker, J.M. (2019), “Is customer satisfaction really a catch-all?
The discrepancy between financial performance and survey results”, Journal of Managerial
Issues, Vol. 31 No. 2, pp. 137-150.
Jeffrey, S., Rosenberg, S. and McCabe, B. (2019), “Corporate social responsibility behaviors and
corporate reputation”, Social Responsibility Journal, Vol. 15 No. 3, pp. 395-408.
Jensen, M.C. (1968), “The performance of mutual funds in the period 1945–1964”, The Journal of
Finance, Vol. 23 No. 2, pp. 389-416.
Jia, Y., Gao, X. and Julian, S. (2020), “Do firms use corporate social responsibility to insure against
stock price risk? Evidence from a natural experiment”, Strategic Management Journal, Vol. 41
No. 2, pp. 290-307.
Krueger, T.M. and Wrolstad, M.A. (2007), “Corporate reputation and investment value”, Journal of
Contemporary Business Issues, Vol. 15, pp. 37-45.
Krueger, T.M. and Wrolstad, M.A. (2016), “Impact of the reputation quotient® on investment
performance”, Corporate Reputation Review, Vol. 19 No. 2, pp. 140-151.
Krueger, T.M., Wrolstad, M.A. and Van Dalsem, S. (2010), “Contemporaneous relationship between
corporate reputation and return”, Managerial Finance, Vol. 36 No. 6, pp. 482-490.
Love, E.G. and Kraatz, M. (2009), “Character, conformity, or the bottom line? How and why Reputation
downsizing affected corporate reputation”, Academy of Management Journal, Vol. 52 No. 2,
pp. 314-335. investing
McGuire, J.B., Schneeweis, T. and Branch, B. (1990), “Perceptions of firm quality: a cause or result of
firm performance”, Journal of Management, Vol. 16 No. 1, pp. 167-180.
Modigliani, F. and Modigliani, L. (1997), “Risk-adjusted performance”, The Journal of Portfolio
Management, Vol. 23 No. 2, pp. 45-54.
119
Muralidhar, A.S. (2000), “Risk-adjusted performance: the correlation correction”, Financial Analysts
Journal, Vol. 56 No. 5, pp. 63-71.
Porritt, D. (2005), “The reputational failure of financial success: the ‘bottom line backlash’ effect”,
Corporate Reputation Review, Vol. 8 No. 3, pp. 198-213.
Roberts, P.W. and Dowling, G.R. (2002), “Corporate reputation and sustained superior financial
performance”, Strategic Management Journal, Vol. 23 No. 12, pp. 1077-1093.
Rose, C. and Thomsen, S. (2004), “The impact of corporate reputation on performance: some Danish
evidence”, European Management Journal, Vol. 22 No. 2, pp. 201-210.
Sarstedt, M., Wilczynski, P. and Melewar, T.C. (2013), “Measuring reputation in global markets – a
comparison of reputation measures’ convergent and criterion validities”, Journal of World
Business, Vol. 48 No. 3, pp. 329-339.
Schwaiger, M. (2004), “Components and parameters of corporate reputation – an empirical study”,
Schmalenbach Business Review, Vol. 56 No. 1, pp. 46-71.
Sharpe, W.F. (1966), “Mutual fund performance”, The Journal of Business, Vol. 39 No. 1, pp. 119-138.
Tetrault Sirsly, C.-A. and Lvina, E. (2019), “From doing good to looking even better: the dynamics of
CSR and reputation”, Business and Society, Vol. 58 No. 6, pp. 1234-1266.
Walsh, G. and Beatty, S.E. (2007), “Measuring customer-based corporate reputation: scale
development, validation, and application”, Journal of the Academy of Marketing Science,
Vol. 35 No. 1, pp. 127-143.

Corresponding author
Kristine L. Beck can be contacted at: kristine.beck@csun.edu

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com