Investors are more Sensitive to Information about Financial Rather than Ethical Reputation of a Company: Evidence from an Experimental Study

IntroductionCompany's reputation is a function of socially shared impressions, collective judgements based on various factors: financial and economic, ethical, social, technological and other environmental impacts (Fombrun, Van Riel, 1997; Scott, Walsham, 2005, Barnett, Jermier and Lafferty, 2006). A good reputation is a strategic asset of a company, as it is said to have an ability to create wealth (Fombrun, 1996). There is a wide array of research on companies' reputation and its impact on investors' decisions. However, the results are inconsistent. Economists found that the relationship between company's reputation and the return on its shares is significant (Brammer, Brooks, Pavelin, 2006) but it does not always occur (Blajer-Golebiewska, 2014a). As the results of various studies in this area are inconsistent, the impact of corporate reputation on investors' decisions in the stock exchange still needs to be carefully examined.As a result, our aim was to identify the nature of the relationship between corporate reputation and individuals' investment decisions. We focused on three reputational factors that influence investment decisions: stock market analysts' recommendation (either neutral or positive), reputation value (either positive or negative), and reputation domain (either ethical or financial). In this study our goal was to test the following two hypotheses. Firstly, we to verify that investors are more sensitive to firm's financial rather than to its ethical reputation. Secondly, we wanted to test whether reputation damage has a stronger impact on changes in the planned investment's value than an improvement in company's reputation.The study presented here extends previous research by evaluating the above hypotheses in an incentivized online experiment and by not relying on a game theoretic approach commonly used in the literature. In turn, we have designed an experiment, which mimics a real stock exchange environment by allowing subjects to buy or sell shares at the volume of their choosing.The article proceeds as follows. The next section provides a brief overview of previous research on various aspects of corporate reputation and its impact on investors' decisions. In the following section, the applied methodologies, as well as the experimental design, are outlined. In the penultimate section, findings on the impact of corporate reputation on investors' decisions are presented and discussed. The final section provides summary and conclusions.1. Literature overviewFirst studies in the area of reputation were focused mainly on building company's good reputation for customers. Later, a growing interest in companies' reputation resulted in analyses of impact of company's reputation on investors' decisions expressed in the demand for shares, share prices, and consequently returns on shares. One of the main streams of research in this area relies on analysis of changes in real share prices on stock exchanges using event study methodology. The proxy for reputation in this case is either a stock market index or a place in the ranking of companies of the best reputation. The reputation refers then either to a company or its managers or even its CFO etc.The relationship between corporate reputation and investors decisions is still not fully understood. Furthermore, there exists a wide array of research with inconsistent results. For instance, applying a ten years data set Brammer, Brooks, Pavelin (2006) conducted an analysis of short-run prices following announcement of the list of Most Admired Firms in the UK. They found positive impact on the abnormal returns in cases of companies of better reputation. However, for companies whose reputation scores decreased, there were still positive abnormal returns. Authors proposed following conclusions: (1) for some investors "any news is good news", (2) this may refer to the fact that some investor find it hard to interpret financial information, and they increase their demand for shares whenever any information is available, what was also revealed by Schwarzkopf (2003). …