Exploring the Link between Corporate Reputation with Sustainability Leadership and Market Valuation: a Comparative Analysis of Award and Non-Award Companies in PSX

Abstract

This study investigated the impact of corporate reputation on companies’ performance as well as their market valuation in the Pakistan stock market. We attempted to explore whether companies with a high reputation for sustainability also perform better in the Pakistan stock market. Validating signaling theory and asset-based theories on the Pakistani market, we explained why companies signal their pledge to sustainability to influence the outside view of reputation. A firm’s reputation for being committed to sustainability is an intangible resource that can increase the value of a firm’s expected cash flows and/or reduce the variability of its cash flows. For finding out the companies with a reputation for sustainability, we used the PSX criteria of the award list. Data was taken from 2014 to 2018 (five years) from the award list announced by Pakistan stock exchange limited. We classify a company as an award company if it continuously got included in the PSX award list in a specified period of four out of five times. Similarly, a non-award company was classified as an accompanying with the same market capitalization as Award Company but not included in the list. In this way, 12 awards and 24 non-award companies were shortlisted. We also include 12 non-award companies of the same sector and market capitalization for sector analysis between reputation and non-reputation. Comparative analysis was carried out through 1-way ANOVA and factor affecting and market valuation of the two groups were explored using regression analysis. These factors included net income (NI), the book value of equity (BV), Size, ROE, ROA, and Leverage (LEV) represented by debt ratio. According to expectation, our results of the t-test suggested that the mean of all variables for the award and non-award companies are significantly different and the mean of award companies are higher than their counterpart. One-way ANOVA results of the sectorial analysis showed that with respect to net income, there is a significant difference between the means of award companies and non-award companies in seven out of nine sectors. Regression Analysis proves our equation that the independent variable has a significant impact on the dependent variable. Our findings showed that the overall firms with incredible sustainability reputation and managed to name on award list of our sample year has a higher valuation by the market when stood out from their counterparty (non-award companies). Hence, our results imply that organizations have to focus on their reputation for corporate sustainability which in turn improves their financial position and enhances their market valuation.