We investigate whether companies with better reputations enjoy a lower cost of equity financing. Using a sample of 9,276 large US companies from 1987 to 2011 and the reputation rankings from Fortune’s “America’s Most Admired Companies” list, we find strong evidence that companies with higher reputation scores enjoy a lower cost of equity capital even after controlling for other factors that determine the cost of equity. In addition, we find that the effect of reputation on the cost of equity increases with the degree of information asymmetry, consistent with the reputation rankings providing information about company quality. We also find that changes in reputation are associated with subsequent changes in the company’s investor base, consistent with reputation rankings affecting investor recognition and improving risk sharing. We contribute to the cost of capital literature by identifying a unique determinant of the cost of equity and to the reputation literature by demonstrating an important benefit that derives from creating and maintaining a high reputation.
Review of Accounting Studies – Springer Journals
Published: May 17, 2014
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