In search for the reputational investment factor

Sammanfattning: This paper looks at corporate reputation and its effect on future firm performance using the Reputation Quotient (RQ) produced by Harris Interactive Inc. as proxy for reputation. The RQ is considered a reliable measure of corporate reputation and is based on a rigorous study employing six dimensions and 20 attributes to obtain the combined view of the most visible American corporations as perceived by the general public. In essence, our thesis aims to discover the possibilities of finding abnormal risk adjusted excess returns (alphas relative to benchmark risk factors) through approaches based on company reputation and to explore if any such phenomena could be explained by extending the benchmark models. In order to investigate this, four investment strategies are constructed with ten companies at a time in each; top10, bottom10, delta top10 and delta bottom10, where the two latter includes the top- and bottom movers between two consecutive years. The portfolio performances from 2001-2018 are measured against the market, the common Fama French factors; size (SMB) and book-to-market (HML), as well as major industry returns. We find that corporate reputation does have predictive power of future firm performance. The investment strategies associated with high reputation show statistically significant abnormal risk-adjusted returns in relation to the market index and when controlling for size and book-to-market. While the top10 portfolio is statistically significant on the 5% level, the delta top10 is only significant on the 10% level. The bottom10 and delta bottom10 portfolios show no statistically significant abnormal returns in either direction. According to our analysis, the additional explanatory power of basing a new risk factor upon corporate reputation seems to be limited, although more data on corporate reputation would be necessary to truly determine the effect of introducing a reputation based factor. Instead, indications point towards frictions and possibly behavioural biases being explanations on why alphas occur among highly reputable firms.