Estimation of Firms' Market Reputation: A Platform for Pragmatic Progress

Abstract

This study provides formal theoretical evidence that in presence of leverage, share prices cannot be characterized to be robust proxies for product price premiums that are outcomes of firms' corporate reputations. The formal theoretical model predicts proxies for each of corporate reputation, and product price premiums can be derived from firms' financial statements. In presence of global convexity of relations between reputation estimates, and estimates of prior period product price premiums, constructs proposed for each of price premiums or corporate reputation are predicted to be robust. Perpetuity of regulatory reporting ensures robust constructs that are derived from firms' financial statements have time series properties, absence of which has stunted development of a rich literature that studies reputation of non-financial corporations. In presence of generality or normativeness of the global convexity condition, and allowance for development of reputation constructs that are industry specific, commonality of robustness theory (across industries) is combined with pragmatism of industry specificity. We have then that differences in effects of corporate reputation are comparable across industries.