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Company Reputation and the Cost of Equity Capital

59 Pages Posted: 9 Jun 2010 Last revised: 29 Jan 2014

Ying Cao

The Chinese University of Hong Kong (CUHK) - School of Accountancy

James N. Myers

University of Tennessee, Knoxville - College of Business Administration

Linda A. Myers

University of Tennessee, Haslam College of Business, Accounting and Information Management

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Abstract

In this study, we investigate whether companies with better reputations enjoy a lower cost of equity financing. Using a sample of 9,276 large U.S. companies from 1987 through 2011 and the reputation rankings from Fortune’s “America’s Most Admired Companies List”, we find strong evidence that companies with higher reputation scores enjoy a lower cost of equity capital even after controlling for other factors that determine the cost of equity. In addition, we find that the effect of reputation on the cost of equity increases with the degree of information asymmetry, consistent with the reputation rankings providing information about company quality. We also find that changes in reputation are associated with subsequent changes in the company’s investor base, consistent with reputation rankings affecting investor recognition and improving risk sharing. We contribute to the cost of capital literature by identifying a unique determinant of the cost of equity, and to the reputation literature by demonstrating an important benefit that derives from creating and maintaining a high reputation.

Keywords: company reputation, cost of equity capital

JEL Classification: M41

Suggested Citation

Cao, Ying and Myers, James N. and Myers, Linda A. and Omer, Thomas C., Company Reputation and the Cost of Equity Capital. Review of Accounting Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1622412 or http://dx.doi.org/10.2139/ssrn.1622412

Ying Cao

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

James N. Myers

University of Tennessee, Knoxville - College of Business Administration ( email )

Haslam Business Building
Knoxville, TN
United States

Linda A. Myers (Contact Author)

University of Tennessee, Haslam College of Business, Accounting and Information Management ( email )

Knoxville, TN
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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