Environmental and social issues involving firms often arise due to difficulties in observing their environmental and social performance. Firms’ greenhouse gas emissions, toxic releases, accounting scandals, insider trading, and child labor abuse are all such cases where stakeholders face challenges in detecting and addressing them beforehand. Therefore, it is often helpful for stakeholders of firms (such as customers, government, investors, etc.) to have reliable and observable information available in normal times to accurately assess firms’ unobservable qualities.
When reliable and direct information about a firm’s unobservable qualities is unavailable, stakeholders might turn to a collective reputation of firms to evaluate difficult-to-observe qualities. A collective reputation refers to stakeholders’ beliefs about which firms belong to a specific group and the stereotype of the qualities and characteristics common to that group. By utilizing a collective reputation, stakeholders associate a firm with a broader group through a common observable trait, and then use their stereotype about that group to infer the firm's other, more difficult-to-observe qualities.
In my dissertation, I propose that a collective reputation is a combination of three attributes: group membership, group stereotype, and salience. Each of these attributes is the subject of my three dissertation studies, where I investigate how changes in each of them affect stakeholders’ evaluation of firms. The first study examines how changes in a firm’s group membership affect its financial performance, using the case of South Korea’s business group firms, known as Chaebol. The second study investigates how changes in stakeholders’ stereotypes about the group influence their investment in a new venture start-up within the context of entrepreneurship. The third study examines how changes in the salience of a collective reputation due to information disclosure affect the financial performance of firms, utilizing the case of the US EPA’s TRI (Toxic Release Inventory) program.
Changes in a collective reputation can significantly impact firms’ financial performance, and thus it is crucial for business practitioners to clearly understand the mechanism of how a collective reputation works and how stakeholders utilize it to evaluate firms’ unobservable qualities. Throughout my dissertation and each chapter, I provide business and policy implications on how practitioners can better use a collective reputation to enhance business sustainability and financial performance.
