Competing in the Capital Market with a Good Reputation

Abstract

This study investigates how a good reputation generates competitiveness for a firm in the capital market. We distinguish two aspects of corporate reputation – trustworthiness and attractiveness – and identify their distinct impacts on reducing management and business risks of investors, respectively. Our findings suggest that trustworthiness enhances investors’ expectations regarding a firm's motives, and gains the firm a competitive advantage from holding a low financing cost. Attractiveness, on the other hand, reduces investors’ uncertainty regarding a firm's ability, and generates the firm a competitive advantage from a high flexibility in choosing different financing instruments. We further demonstrate the impacts of these two types of competitive advantage on the capital structure management of a firm.