Corporate reputation: disentangling the effects on financial performance

Abstract Purpose – Theory has made many assumptions about the consequences of a "good" corporate reputation. The aim of this paper is to provide evidence of the effect of a positive corporate reputation on the firm's future financial performance by means of a more differentiated concept of reputation than the one commonly used in literature. Design/methodology/approach – In contrast to prior research, reputation is conceptualised by means of a two‐dimensional approach. Therefore, two distinct reputational components are hypothesised as affecting financial performance differently. A large‐scale representative survey of 30 of the largest German firms is conducted to gain reputational evaluations of these firms. The overall assessment of reputation is differentiated into a part that is explained by past financial performance and an idiosyncratic part to control for the effect of past performance on today's reputation. Finally, the idiosyncratic effect of reputation on future performance is assessed with an econometric model. Findings – Both the cognitive and the affective reputational dimension significantly influence future financial performance after controlling for past performance. Furthermore, the results suggest that the decompositional model outperforms a non‐decompositional approach in terms of goodness of fit. Research limitations/implications – There is only a limited possibility to generalise the results to all firms. Practical implications – The results imply a need for differentiated reputation management, since the cognitive and affective components of corporate reputation drive financial performance differently. Originality/value – The two‐dimensional reputational approach broadens prior research with a focus on the differences in performance – the effects of both the reputational components.