Reputation and Business Sustainability: The Effects of Reputational Events on Market Capitalisation in FTSE/JSE Top 40 Index Entities, 2010-2020

Abstract

Corporate reputation is considered an important factor in the operational success and stock market performance of companies. Despite this accepted correlation, there are limited studies with varying results concerning the relationship between reputational events and the sustenance of competitive advantage by listed companies. This study sought to establish whether there existed a relationship between reputation and business sustainability by assessing the effects of reputational events on the share prices/market capitalisations of FTSE/JSE Top 40 Index entities.

The event study methodology and Tobin’s Q ratio were used to study the effects of the reputational events. This study found that reputational events are associated with significant negative cumulative average abnormal returns on the day of the event announcement (CAARt0= -6,25%), five days later (CAARt+5= -34,21%), and at the end of the post-event window (CAARt+30= -29,35%). Furthermore, reputational events were shown to negatively affect the state of company valuation by eroding the computed average q throughout the event window, and with the cumulative loss in the average value of q at the end of the post-event window being -0,23.

The results highlighted the need for listed firms to include reputation within their risk management frameworks, and for practitioners to implement reputation management strategies. Further research on the factors influencing the change in effect on days following the event day (t0) and the varying severity of the effects of reputational events across companies may generate useful insight for the management of corporate reputation in listed companies.

Keywords: Corporate Reputation, FTSE/JSE Top 40 Index, Event Study Methodology, Market Reactions, Tobin’s Q, Johannesburg Stock Exchange, Reputational Risk, Reputational Events

JEL Classification: G140, G400