Reputation and Stakeholders: How Stakeholder-specific Reputations Affect Controversial Actions

Abstract

This study enhances our understanding of organizational reputation by exploring how a firm’s reputation in the eyes of different stakeholders influences the likelihood of its taking a controversial action, such as downsizing. On the one hand, firms that have a positive reputation are likely to be motivated to self-govern because of fear of losing reputation and losing future gains. On the other hand, reputable firms are more confident in their social acceptance and less limited by social norms and, therefore, less motivated to self-govern. To resolve this contradiction, I employ a stakeholder- based perspective that views the role of reputation in preventing a controversial action as contingent on stakeholders’ perception of such an action. Specifically, I examine how positive reputations in the eyes of two important stakeholder groups – investors and the public – affect the likelihood that a firm engages in a controversial strategy (for this study, downsizing). Using a longitudinal dataset of the 100 largest U.S. firms from 2004 to 2013, I find evidence for relationships between stakeholder-specific reputations and downsizing and for how this relationship varies depending on firms’ financial performance. In general, I find that firms that have positive reputations among investors as well as firms that have positive reputations among the public were less likely to downsize than other firms. However, the effect of these two reputations on the relationship between negative financial performance and the likelihood of downsizing diverged: whereas there was no evidence that a firm’s reputation with respect to investors changed the association of financial performance and the chances of downsizing, I find some evidence that reputation with respect to the public moderated the relationship between financial performance and downsizing. That is, positive reputation with respect to the public mitigated the relationship between financial performance and downsizing, but negative reputation with respect to the public amplified the relationship between financial performance and downsizing. These findings suggest that reputations with respect to different stakeholders control firms’ engagement in a controversial action to different degrees, and these differences can be explained by particular stakeholders’ preferences in particular contexts.