In Search of Meaning: Does the Fortune
Reputation Survey Alter Performance
Expectations?
W. Glenn Rowe
Ira C. Harris
University of Western Ontario
University of Notre Dame
Albert A. Cannella, Jr.
Tony Francolini
Texas A&M University
University of Western Ontario
Rbsumb
Abstract
Our study theoretically and empirically examines performance antecedents and consequences of the Fortune
annual Survey of Corporate Reputation. Accountingand market-based measures of performance are used to
predict the ratings, and investor reactions to the publication of the ratings are predicted to be associated with
the extent to which the ratings diverge from antecedent
predictions. Lower-than-predicted ratings should generate a negative response while higher-than-predicted ratings should generate a positive response. Contrary to
expectations, we found a negative relationship. In addition, this negative relationship was only for the lowerthan-predicted ratings. For higher-than-predicted ratings the relationship with investor reaction was
insignificant.
Notre d u d e consiste en un examen the'orique et
empirique des facteurs influencant le classement annuel
du magazine Fortune et des cons&quencesde ce classement sur la performance des firmes fvalukes. Nous
utilisons des mesures comptables et financitres pour
examiner le lien entre la pegormance et la re'putation de
la prme. La facon dont les investisseurs re'agissent a ces
e'valuations doit en principe Ztre proportionnelle au
degre' de divergence par rapport aux predictions
ante'rieures. ThPoriquement, les e'valuations qui sont
moins fleve'es que pre'vues entrainent une re'action ne'galive des investisseurs, tandis que les &valuationsqui sont
plus deve'es que pre'vues entrainent une re'ponse positive
des investisseurs. Mais dans la re'alitt?, on observe plut6t
une relation inverse, en l'occurrence dans le cas des
e'valuations qui sont moins fleve'es que pre'vues. Les
e'valuations qui sont plus e'levkes que pre'vues n'ont
qu'un impact limit6 sur la re'action des investisseurs.
The research can be divided into two groups. Some
research interest focuses on the content of the survey
(i.e., what is actually measured). These researchers have
evaluated the accuracy and design of the reputation
scales. For example, Fryxell and Wang (1994) suggest
the survey is one-dimensional (referring to the high
intercorreIation of the items in the survey).
On the other hand, the importance of the survey may
be independent of the question of survey content. Other
research has focused on determining whether the reputation survey is beneficial due to its accessibility. Does the
survey provide new information? Or, conversely, is the
survey simply redundant because it provides previously
available information? This prompted us to question
whether the business market values the information disseminated in the published survey. From a strategic management perspective, this question is important because
Does Fortune's annual corporate reputation survey
influence investor behaviour? Certainly, Fortune's annual survey coronets "America's Most Admired Companies" and has attained a prominent status among readers
of Fortune magazine. It has also attracted the attention of
strategic management scholars (Ballen, 1992; Brown &
Perry, 1994; Davidson, 1990; Dollinger, Golden, & Saxton, 1997; Fombrun & Shanley, 1990; Fryxell & Wang,
1994; Hammond & Slocum, 1996; McGuire, Schneeweis, & Branch, 1990). The level of research focus on
the survey suggests that the results are not only popular,
but are also important.
Address correspondence to W. Glenn Rowe, Richard Ivey School of
Business, University of Western Ontario, London, ON, Canada N6A
3K7. E-mail: [email protected]
0 ASAC 2003
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DOES THE FORTUNE REPUTATION SURVEY ALTER PERFORMANCE EXPECTATIONS?
ROWE ET AL.
mance are important antecedents to the ratings a firm
receives in the Fortune survey. We expand on the
accounting- and market-based measures that have
already established this antecedent effect in previous
research by using year-length measures as antecedents.
Second, we predict that publication of the survey will
initiate a measurable response from investors to the
extent that the survey’s reputation ratings differ from
what would be predicted by performance information
available before the survey is published; the unexpected
portion of the reputation ratings will comprise new information to which investors will react.’
it can govern internal resource allocation (Barney, 2002)
decisions (e.g., efforts to trumpet the results to potential
employees, customers, and suppliers; initiatives to
change functional strategies in response to favourable or
unfavourable ratings).
A large amount of information (e.g. annual reports,
proxy statements, news reports) is widely available for
virtually all of the firms rated in the Fortune survey.
Commonly held assumptions of semi-strong market efficiency imply that investors continuously incorporate this
financial information into their expectations of future
firm performance (Brown & Warner, 1985). Yet, several
authors (Brown & Perry, 1994; Fombrun & Shanley,
1990; Fryxell & Wang, 1994; Hammond & Slocum,
1996) have concluded that the ratings are of negligible
value beyond describing past financial performance.
Brown and Perry (1994) refer to the influence of past
performance on future performance as a halo effect that
negates the impact of reputation on future performance.
By extension, this suggests that the survey simply
restates existing financial performance information and
condemns the survey as meaningless because its publication would represent the release of “old news.” Clearly, this raises validity questions for research uses of the
survey as an outcome variable.
The aim of our study is to go beyond the debate on
the content of the survey and investigate whether
investors value the publication of the results. A significant response to this question would suggest that the ratings provide new and unique information that is valued
by investors and reflected in their investment decisions
and would, therefore, be strategically important to firms’
top management teams. This would certainly seem to
reflect the intent of the publisher in designing and implementing the annual series. Accordingly, our study was
guided by the research question: Does the Fortune reputation survey represent new information to investors and,
by implication, to practicing managers? We sought to
examine this question by observing how investors react
to the publication of the Fortune reputation survey. For
example, if investors alter their performance expectations based on information from the survey (as a significant investor reaction would indicate) then it suggests
that they draw substantive meaning from the survey. A
significant investor reaction would be clear evidence that
the survey is valuable to investors and that the information revealed in the survey is not available from other
public sources.
Performance Antecedents of Reputation
Several studies (Brown & Perry, 1994; Fombrun &
Shanley, 1990; Hammond & Slocum, 1996; McGuire et
al., 1990) empirically suggest that accounting measures
of risk and return are important antecedents to the Fortune ratings. Because these associations are well established, we use accounting returns and risk as controls in
our analyses.
In contrast to accounting-based measures, marketbased measures signal current information, which
includes expectations regarding the firm’s future
prospects (Fombrun & Shanley, 1990). High returns to
shareholders, measured as the wealth increase experienced by shareholders who held the stock during the
previous year, are expected to send favourable signals
and lead to higher reputation ratings. McGuire et al.
(1990) note that the market based riskheturn measures
may be more accurate than accounting measures
because they are free of managerial manipulation.
While McGuire et al. and Fombrun and Shanley examined market-based measures in their studies, there is little empirical evidence available regarding the effects of
year-length investor returns as antecedents of Fortune
reputation ratings.
Conceptually, Hammond and Slocum (1996)
argued that favourable reputations are a result of the
generation of above average returns. Fombrun and
Shanley (1990) posited that high levels of market performance lead to firms and their managers being
favourably assessed by their external analysts, creditors,
and investors. They argued that market returns signal
present information regarding firms’ current activities,
results, and prospects to these stakeholders. Fama
(1970) and Fombrun and Shanley (1990) have argued
that external analysts, creditors, and investors are very
aware of firms’ market performance and include these
data in their investment decisions. It makes sense that
they would include the same data in their rating of a
firm for the Fortune annual survey.
Capital market risk captures the uncertainty con-
Background and Theory
Our approach is twofold. First, we begin with the
assertion that accounting and market measures of perfor-
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ROWE ET AL.
DOES THE FORTUNE REPUTATION SURVEY ALTER PERFORMANCE EXPECTATIONS?
fronting investors who own the firm’s stock. The essence
of corpofate reputation is beliefs about the firm-what it
stands for, how it will act and react. A firm that has reacted well in the past to unexpected negative events or competitive challenges will be viewed as less risky. Conversely, firms that responded poorly in the past to
unexpected events or competitive challenges will not
inspire investor confidence in their abilities to handle
such contingencies in the future, leading investors to
view such firms as risky. A company that is less risky is
one that outsiders and insiders alike trust to behave in
certain ways, responding effectively to challenges.
Therefore, raters will give higher ratings to firms with
low risk and lower ratings to firms with high risk. Thus,
we expect firms with a strong return to investors to be
rated higher by respondents to the Fortune survey. In
addition, we expect firms with a low capital market risk
to be rated higher by respondents to the Fortune survey.
Of course, the converse is also the case for firms with
low market return and high capital market risk.
firms themselves, the media, analysts). Investors also utilize this intangible or invisible asset to value a firm.
Using an index he developed called a “reputation quotient”,2 Fombrun (2001) found that firms with higher
reputation ratings attracted investors who bid up the
value of the stock-an event Fombrun labeled a “value
spiral” (p. 14); weak reputation ratings lowered the value
of the stock. Under semi-strong assumptions of capital
market efficiency, investors respond quickly to new
information about investments. If the Fortune ratings
provide valuable new information to investors, then the
investor reaction will reflect these future rent and cost of
capital implications. Higher rated firms will experience a
positive investor reaction and vice versa. In the context
of our study, when the Fortune reputation ratings are
published, investors are already privy to accounting- and
market-based information about publicly traded firms.
Accordingly, the reputation ratings-the summary opinion of experts about corporate reputation-will constitute new information to investors only when it differs
from what is expected, given public information on risk
and returns.
This new information will generate investor reaction. We predict that survey ratings higher than expected
will generate a positive response while survey ratings
lower than expected will generate a negative response. In
more formal terms:
H1: The level of market return will be positively
associated with subsequent overall reputation rating.
H2: The level of market risk will be negatively associated with subsequent overall reputation rating.
Reputation Effects on Investor Performance
Expectations
H3: Investor reaction to publication of the Fortune
ratings will be positively associated with the difference between the actual published rating and the rating predicted by publicly available antecedent measures of risk and r e t ~ r n . ~
A number of authors have suggested that reputations, a theoretical construct, are an intangible or invisible asset that a firm may cultivate or utilize to influence
its ability to capture future rents (Black, Carnes, &
Richardson, 2000; Caves & Porter, 1977; Dollinger et
al., 1997; Fombrun & Shanley, 1990; Weigelt & Camerer, 1988). A firm’s reputation may influence future rents
by limiting its competitors’ market access and/or by generating greater premium-price flexibility, greater access
to capital, greater access to top quality employment
applicants, and greater customer brand awareness or loyalty. Through the use of strong product branding, advertising strategies, pricing strategies, visible competitive
moves, and high profile employees firms can develop
and maintain reputations to facilitate the capture of these
rents. Dollinger et al. (1997) found that firms receiving
higher Fortune reputation ratings were more likely to
engage in joint venture activity, an activity designed to
increase future rents. Reputation is particularly important to firms competing in industries where incomplete
or ambiguous information or diverse public demands
exists (Fombrun & Shanley, 1990; Weigelt & Camerer,
1988).
Fombrun and Shanley (1990) indicate the public
constructs reputations from a mix of signals from a variety of available sources (e.g., market information, the
Methods
Sample
Since 1982, Fortune has annually asked executives,
outside directors, and business analysts to rate the 10
largest companies in their own industries. Ratings are
gathered on eight attributes that relate to reputation:
quality of management; quality of products and services;
innovativeness; long-term investment value; financial
soundness; ability to attract, develop, and keep talented
people; community and environmental responsibility;
and use of corporate asset^.^ Each attribute was scored
on a scale of 0 (poor) to 10 (excellent). An overall company score was calculated by averaging a firm’s rating
on the eight attributes.
Approximately 8,000 surveys are mailed out by Forrune each year. The response rate ranged from 40 to 50%
in the early years, but has not been reported since the
publication of the 1986 data. Further, Forrune publishes
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Investor reaction. Investor response to the Fortune
survey publication was assessed with a financial event
methodology (Brown & Warner, 1985). We began by
identifying the date on which each Fortune reputation
issue became available to the public. This is usually a
simple process in event studies, as the Wall Srreet Journal is used as the data source, and the date of each issue
represents the date of publication. With Fortune magazine, the issue is a bit more complex. Each issue of Fortune has a date associated with it, but the date references
an approximate publication date of the next issue. In
effect, this date is more akin to an expiration date than a
publication date. To resolve this problem, we identified
as day zero (the date when the information became widely available to the public) as the date5 on which our
library received each Fortune reputation issue. Investor
reaction was then gauged with a window running from
day -12 through day +3. (We examined a number of time
intervals, ranging from -20 to +3, to -5 to +3. All yielded the same signs as those reported here, and virtually all
had similar significance levels.) Following the method
discussed in detail by McWilliams and Siegel (1997), we
summed the prediction errors over our observation window. We refer to this measure as investor reaction.
McWilliams and Siegel recommend that “an event window should be as short as possible” (p. 636) but also suggest that the nature of the event should determine the
length of the window, and they provide an example using
a larger window when leakage of information is likely. In
this situation, they argue for a window that commences
well prior to the announcement of the event so that
abnormal returns related to the event are captured. Given
that the corporate reputation issue must be assembled
and sent to the printer well in advance of actual delivery,
our relatively wide window seems appropriate.
Control variables. Prior research has very strongly
supported two conclusions about the Fortune reputation
survey. First, although the survey purports to measure
eight independent dimensions of reputation, factor analyses clearly indicate that there is only one factor present,
and that single factor accounts for some 80% of the variance in the ratings (Fryxell & Wang, 1994). McGuire et
al. (1990), using 1983 data, also concluded high intercorrelations among these eight attributes (average = 0.75),
but noted that social responsibility had a lower correlation of 0.67. Second, the single factor captured by the
mean of the eight dimensions is very strongly associated
with prior financial performance. For instance, Fombrun
and Shanley (1990) concluded that accounting measures
of profitability are strongly associated with Fortune’s
overall reputation rating. Brown and Perry (1994), Hammond and Slocum (1996), and McGuire et al. also report
very strong and positive associations between accounting
returns and the overall Fortune reputation rating.
only summary data-the average rating across respondents on each dimension and the overall average rating.
We selected-a six-year interval, 1986 to 1991, for
testing our hypotheses. We selected 1986 as the starting
year because it was the fifth year of the survey and so
respondents were familiar with the survey and investors
were familiar with the published results in form, if not
the specifics of content. The inclusion of six years in the
study permitted us to gather a reasonable number of
observations upon which to conduct statistical analyses.
In the six years we selected, Fortune published a total of
1,828 ratings, corresponding to firm-years. Missing data
reduced the number of usable observations to 1,241.
Fortune implements the reputation survey from September through November of each year and publishes
the results in January or February of the following year.
We gathered the accounting- and market-based performance measures from COMPUSTAT and CRSP, respectively. About 77% of sample firms have fiscal years corresponding to calendar years. For these, accountingbased numbers reflect the firm’s published data for the
fiscal year that ended December 31 of the year prior to
that in which the ratings were published. For the remainder, we used fiscal year data for the nearest fiscal year
end prior to the publication of the ratings.
Measures
Reputation. Reputation was operationalized as the
mean of the eight attributes measured by Fortune. Fryxell and Wang (1994) provided very strong evidence that
these eight attributes represent a single, latent construct.
The reliability associated with the overall rating is very
high (Cronbach’s alpha = 0.97), suggesting that the mean
of the eight dimensions is an appropriate substitute for
the individual ratings (Carmines & Zeller, 1979). In our
study, the current year’s reputation is the key dependent
variable. The previous year’s reputation, because it is
part of the public information available to investors, is
included as a control variable.
Market-based prior performance. We used two indicators to measure market-based performance. We used
daily firm returns and equally-weighted market returns
to generate measures of total risk (market risk) and market-adjusted shareholder return (market-adjusted refurn).
Market risk is the standard deviation of the firm’s daily
returns over the fiscal year. Market-adjusted return was
estimated by compounding the daily returns to shareholders over the firm’s fiscal year, and subtracting from
that figure what shareholders would have made if they
had invested in a fully diversified portfolio rather than in
the firm’s stock. Conceptually, this measure is similar to
industry-adjusted performance (Dess, Ireland, & Hitt,
1990).
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Table 1
Descriptive Statistics
Mean
Investor Reaction
Reputation
Reputation(t- 1)
Mkt Adj Return
Market Risk
ROE
Debt-to-equity
Log(Citations)
Log(Emp1oyees)
-.06
6.41
6.45
-.08
.02
.12
.82
2.57
3.52
Std Dev
.08
.93
.89
.35
.o1
.I 1
.95
1.44
1.09
1.
2.
-.27*** .
-.20*** .go***
-.30*** .21***
.02
-.42***
-.22*** .47***
-.38***
-.Ol
.19***
-.09**
.19***
3.
4.
.09**
-.38***
-.07**
5.
6.
7.
8.
.
.36***
.38***
..33*** _,17***
.22*** -.07**
.21***
.05*
-..29***
,37***
-‘.11***
-‘.17***
.
-.25***
.02
.04
.
- .05.
-.08**
.62***
* p<.05
** p<.o1
*** p<.Ool
so both were log transformed. Because it is part of the
publicly available information, we also included the
firm’s previous ratings in the Fortune survey, that is, the
firm’s average rating for year t- 1. Finally, we included 30
dummy variables to control for any fixed effects due to
industry (at the 2-digit SIC level). All variables in regression analyses were examined for multicollinearity using
the variance inflation factor (VIF). In all of our analyses,
the VLFs ranged from I . I to 2.1, suggesting that multicollinearity was not a problem. Table 1 provides means,
standard deviations, and a correlation matrix for the variables used in the analyses. Because the data analyzed in
Table 2 represent a pooled cross-sectional time series
(Dielman, 1983) we tested for the presence of autocorrelation. For the model in Table 2, the Durbin-Watson statistic was 1.9, suggesting that autocorrelation was not a
concern in the analysis.
One interesting and surprising statistic in Table 1 is
the mean of the investor reaction measure. Recall that
this measure cumulates the investor reaction from
day -12 to day +3 (a 16-day window). This measure
indicates a mean negative response to the survey
(mean = -0.06; std dev = 0.081). A t-test indicates that
this measure is significantly different from zero
(t = 27.6; p < 0.001). This negative reaction implies that
investors, on average, react negatively to the survey.
This is surprising since the mean rating of 6.41 represents an “above midpoint” rating for the 10-point scale
used. Prior to running the analysis, we expected
(though we did not hypothesize) that investors, on average, would react favourably to the publication of the
ratings.
Beyond profitability, Brown and Perry (1994) report
a significant, negative association between overall Fortune rating and firm-level risk, measured as debt-to-equity ratio. Fombrun and Shanley (1990) also concluded
that their measure of accounting risk, the coefficient of
variation of return on invested capital over a nine-year
period, was negatively related to Fortune reputation ratings. These results suggest that accounting measures of
risk and return are important antecedents to the Fortune
ratings. Because these associations are well established,
we use accounting returns and risk as controls in our
analyses. Accounting-based performance was measured
in two ways: return on equity (ROE), and debt to common equity (debt-to-equity).ROE, defined as net income
before extraordinary items divided by common equity,
measured profitability. The ratio of total debt to common
stockholder’s equity measured accounting risk.
Firm size was included as a control variable and was
measured as the number of employees. Fombrun and
Shanley (1990) and Brown and Perry (1994) found size
(measured as sales) to be positively related to the Fortune reputation rating. In addition, year was included to
remove any variance related to a year-to-year effect. Five
dichotomous variables were included for the years 1986
to 1990. We also included a measure of media exposure
to remove the effect of name familiarity. This was operationalized as the number of media citations reported in
ABVInform during the calendar year in which the ratings
were gathered. We refer to this measure as citations, and
it is similar to the visibility measure used by Fombrun
and Shanley (1990). The distributions for number of
employees and number of citations were quite skewed,
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Predicting the Fortune Reputation Rating
Table 2
Regression Model: DV = Reputation Rating
Hypotheses 1 and 2 require a multivariate regression
analysis with the Fortune rating as the dependent variable, and Hypothesis 3 requires that we create estimates
of what we expect the Fortune reputation rating to be,
given publicly available information prior to the release
of the ratings. We used a regression model to estimate
coefficients for our independent and control variables (to
test Hypotheses 1 and 2) and subsequently to generate
predicted values of the reputation ratings to compare
with the actual ratings. The residuals (actual ratings
minus predicted ratings) from the regression model
became our measure of the extent to which the actual ratings differed from expectations (i.e., predicted ratings).
We correlated the residuals with investor reaction to test
Hypothesis 3. If there was no new information in the
Fortune ratings then there should be no significant correlation between the residuals and investor reaction.
However, a significant correlation between the residuals
and investor reaction means that there is something over
and above the variance explained by the financial information being used to explain variance in the ratings. The
regression model appears in Table 2.
The coefficients in Table 2 hold no surprises. First,
the previous year’s reputation rating received by the firm
is positive and highly significant (B = 0.83, p < 0.001).
As prior researchers have reported, we found a very
strong and positive coefficient for ROE (B = 1.03, p <
0.001) and a very significant and negative coefficient for
debt-to-equity ratio (B = -0.06; p < 0.001). The
explained variance, assessed by adjusted r-squared, is
over 86%, suggesting that the model is well specified.
Hypothesis 1, which predicted that the return shareholders achieved during the fiscal year prior to the publication of the ratings would be positively associated with
the published ratings, was strongly supported. The coefficient for market-adjusted return is positive and strongly significant (B = 0.27; p < 0.001). The coefficient for
market risk is negative and highly significant (B = -8.10;
p < 0.001), providing strong support for Hypothesis 2.
High levels of capital market risk are clearly associated
with lower Fortune reputation ratings.
We turn now to investor reaction to the survey’s
publication. Table 3 provides the correlation between
investor reaction and the residual from the regression
model reported in Table 2. Recall, the residuals from the
regression model of Table 2 (calculated as actual ratings
minus predicted or expected ratings) are measures of the
extent to which the reputation ratings differ from predictions formed by noting publicly available accountingand market-based profitability and risk measures. Contrary to Hypothesis 3, the correlation is significantly negative (r = -0.101; p < 0.001).
Independent Variables
Intercept
Reputation (t- 1 )
Market-adjusted return
Market risk
ROE
Debt-to-Equity
Log(citations)
Log(emp1oyees)
Year 1986
Year 1987
Year 1988
Year 1989
Year 1990
Adjusted R2
F
df
N
Coefficient Estimates
1.33***
.83***
.27***
-8.10***
1,03***
-.06***
.02
.03t
-.15***
-.07t
-.11**
-.13**
-.29***
.86
183.87***
42, 1198
1241
t p<. 10
* p<.05
** p<.o1
*** p<.oo1
The negative correlation across all firms in the sample surprised us, so we split the sample into positive and
negative deviations from expectations to see if the
results were driven by firms with actual survey ratings
higher than predicted, or those with actual survey ratings lower than predicted. As can be seen from Panels 2
and 3 of Table 3, the negative correlation persists
regardless of whether the deviation from predicted ratings is higher-than-predicted (r = 4 . 0 1 3) or lower-thanpredicted (r = -.086; p c 0.05). However, only the firms
receiving actual survey ratings lower than expected have
a significant correlation between the divergence (in
actual survey rating and predicted rating) and investor
reaction. In other words, the Fortune corporate reputation survey prompted investors to reshuffle a portion of
their portfolios if the actual ratings were lower than the
expected ratings. Stocks of firms that received actual
ratings higher than predicted by financial and market
performance measures were neither bought nor sold.
However, stocks of firms that received actual ratings
lower than predicted by financial and market performance measures were bought, with more being bought
the greater the actual ratings were lower than the expected ratings.
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DOES THE FORTUNE REPUTATION SURVEY ALTER PERFORMANCE EXPECTATIONS?
Table 3
Correlation Between Investor Reaction and Divergence of Actual from Expected Ratings
Panel 1: Full sample (N = 1241)
Divergence from expectations
~~
Investor Reaction
-.101***
~
Panel 2: Actual survey ratings higher than expected ratings (N = 674)
Divergence from expectations
Investor Reaction
-.013
Panel 3: Actual survey ratings lower than expected ratings (N = 567)
Divergence from expectations
Investor Reaction
-.086*
* p<.05
*** p<.oo1
summary evaluations of company and industry experts
shoild be of value to investors.
If Fombrun and Shanley (1990) are correct in arguing that the survey reflects financial health alone, then
the ratings should be merely an affirmation of previously available information, and should lead to no reaction
at all; that is, the relationship between investor reaction
and divergence from expectation should not be significant, as reported in Table 3. Fryxell and Wang (1994)
posit that the survey may be a measure of a firm’s reputation as an investment, but clearly expect that the rating
would be positively interpreted. The strong negative
investor reaction that we found requires a different
explanation. Our findings suggest that investors are
expecting future cash flows to remain steady for firms
with survey ratings higher than expected, and increase
for those with survey ratings lower than expected.
Discussion
Because of the importance associated with corporate reputation, Fortune’s reputation survey has attracted
attention from both practitioners and researchers. The
purpose of our study was to simultaneously examine
accounting- and market-based performance antecedents
to reputation ratings, and the investor reaction to the publication of the ratings so as to isolate whether new information, if any, was being revealed to investors by the
survey. While the hypotheses associated with the former
goal were substantiated as expected, the hypothesis associated with the latter purpose revealed significant and
surprising results.
Our results suggest that these summary evaluations
are valuable, but for reasons opposite to those proposed
by Fortune magazine. Our evidence implies that
investors use the survey to identify firms with survey ratings greater than expected and firms with survey ratings
lower than expected, and alter their investment outlook
accordingly. This result was surprising to us because the
widespread view on the Fortune reputation survey is that
a high reputation rating is desirable. The semi-strong
market efficiency argurnent (Fama, 1970, 1991; Muth,
1960) holds that a company’s share price reflects all publicly available information. This suggests that any financial performance information embedded in the survey
will be of little worth to investors as it reflects old news.
Conversely, we expected that the survey itself would
reveal important information to investors because the
The Icurus Paradox Explanation
We offer several potential explanations for this phenomenon. First, investors may be expecting firms with
survey ratings higher than expected to behave in a manner consistent with Miller’s Icarus Paradox assertion.
Miller (1990) argues that a company’s greatest assets can
lead to its demise. He states: “Companies extend and
amplify the strategies to which they credit their success
... Strategies become less balanced. They center more
around a single core strength that is amplified unduly
while other aspects are forgotten almost entirely” (p. 314)
193
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DOES THE FORTUNE REPUTATION SURVEY ALTER PERFORMANCE EXPECTATIONS?
responding to the external environment. Our results may
reflect an effect in which the market anticipates a managerial reaction consistent with prospect theory and estimates future performance accordingly. In the paraphrased words of a former investment analyst-it is
more important to safeguard what you already have if
you are doing well. He went on to say that, first and foremost, one must conserve the trust; it is much worse to
lose money than to not make money (Saparito, 2003).
Becoming one of America’s “Most Admired Companies’’ does appear to epitomize corporate success and
typically highlights one or two activities that the firm
does very well. Therefore, if the Fortune survey represents a proxy for success (irrespective of what is actually being measured), then Miller’s theory would predict a
subsequent deterioration in performance-a prediction
consistent with our results.
The Hubris Explanation
The Reputation versus Essential Activities
Explanation
Second, the strong negative association between
reputation rating and investor reaction suggests that
investors may expect highly rated firms to act in ways
consistent with Hayward and Hambrick’s ( 1997) theory
on CEO hubris. Hayward and Hambrick found that the
hubris factor is positively associated with acquisition
premiums and negatively associated with performance
and shareholder returns. Because of its prominence in
the business community, the Fortune survey may be
viewed as a grand ego booster for management. Therefore, a survey rating higher than expected may prompt
investors to fear that managers will undertake unprofitable projects or at least projects with a lesser potential
to generate cash flow.
Finally, Perrow (1961) argues that the generation
and maintenance of a reputation may create internal conflicts and deflection from organizational goals: that is,
emphasis upon reputation may divert resources away
from essential activities. Investors may perceive higher
than expected ratings as a signal of long-range commitments that are contrary to employee or shareholder values; therefore, investors may take a wait and see attitude
and not make any changes in their investment portfolios.
Conclusion
With regard to whether the Fortune survey provides new information to investors, our results suggest
that it is indeed a source of new information. However, the information may not lie i n the ratings alone, but
rather in what implications the ratings hold for subsequent firm performance. This is an interesting contribution in several ways. First, the results are surprising
and we, as researchers, should be careful not to assign
an inappropriate meaning to the annual survey results.
While the question of what the survey actually measures will no doubt continue to be debated, our findings suggest that the survey results are important. Second, the investment community, a key stakeholder that
managers typically watch carefully, has apparently
found value in the Fortune survey as a source of new
information. The value they have found, however,
causes them to act differently than we expected-they
seem to ignore firms with survey ratings higher than
expected and increase the value of firms with survey
ratings lower than expected. Finally, based on our
study, we would caution managers of firms to view
their rank in the Fortune ratings with a critical eye and
not make any investment decisions that would try to
change their position in the ratings. What may be more
appropriate is to strive to provide the best products and
services to customers, to treat managers and employees with respect, and to let the ratings take care of
themselves.
The Prospect Theory Explanation
Third, the inverse relationship between unanticipated reputation rating and market response is also
consistent with prospect theory. Kahneman and Tversky (1979) argue that decision-makers are more riskaverse under conditions of negative returns. Shapira
(1986) and MacCrimmon and Wehrung (1986) found
support for this theory whereby managers believed that
fewer risks should be taken when things are going
well. Likewise, March and Shapira (1987) found that
the relation between current position and some critical
reference points (the survey results provide very clear
reference points) is affected by risk taking. Furthermore, the survey results convey a particular meaning
(i.e., whether the firm is considered one of “America’s
Most Admired Companies”) and therefore may influence strategic decision-making (Dutton & Jackson,
1987).
Fourth, to the extent that managers view their reputation rating as a “report card,” a survey rating lower than
expected could prompt riskier decisions. March and
Shapira ( 1987) argue that decision-makers engage in
such behaviour independent of the actual probability of
success. Conversely, companies that score a survey rating higher than expected may “hunker down” in an effort
to retain their status. Such a risk-averse posture may
result in a failure to be proactive in scanning and
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Notes
As one anonymous reviewer pointed out, it may be that
the information is also valuable because it is in a more
accessible format.
Fombrun’s reputation quotient measures reputation on six
dimensions: corporate appeal; products and services;
financial performance; vision and leadership; workplace
environment; and social responsibility. Each respondent
uses a different ratio of these six dimensions depending on
their personal view of what is important. Fombrun indicates that the maintenance of one’s reputation depends on
five principles: maintaining distinctiveness in the view of
respondents; showing a focus of actions and communications; maintaining a consistency of action and communications; providing an identity that is genuine and not
based on hype; communicating in a transparent manner.
As used here, the word difference refers to the value
obtained when the predicted rating is subtracted from the
actual rating subsequently published in Fortune.
For more survey details, please consult any Fortune corporate reputation issue or Ballen (1992). For a discussion
of the survey‘s limitations, please see Fombrun and Shanley (1990) andor Fryxell and Wang (1994).
Our library stamps a date of receipt on all periodicals, and
care is taken to assure that the date stamped matches the
actual date of receipt.
The model also ircludes 30 indicator variables (not shown
below) to control for industry effects at the 2-digit level.
Without the industry controls, the R-squared of the model
is 0.858 versus the 0.861 of the model below. A full versus restricted F-test indicated that the industry controls
added marginally to the explanatory power of the model,
so they were retained.
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