The Impact of Corporate Reputation on Cost of Debt: A Panel Data Analysis of Indian Listed Firms
Abstract
:1. Introduction
2. Concept of Financial Reputation
3. Literature Review and Hypothesis Development
4. Research Methodology
- □
- Kd = αit + β1 Financial reputation it + β2 Current Ratio it + β3 Total Assets it + β4 Beta it + β5 Institutional ownership it + β6 Debt Equity Ratio it + β7 Financial Performance it + β8 Interest Coverage Ratio it.
5. Results and Analysis
6. Discussion and Conclusions
Author Contributions
Funding
Data Availability Statement
Conflicts of Interest
1 | https://shodhganga.inflibnet.ac.in/bitstream/10603/124952/12/12_chapter%206.pdf (accessed on 29 January 2023). |
References
- Alvarado-Vargas, Marcelo J. 2013. The Mediating Effect of Innovation on the Relationship between Corporate Reputation and Performance in US Firms. Available online: http://digitalcommons.fiu.edu/etd/927 (accessed on 17 May 2016).
- An, Heng Hunter, and Kam C. Chan. 2008. Credit ratings and IPO pricing. Journal of Corporate Finance 14: 584–95. [Google Scholar] [CrossRef]
- Anderson, Jeff, and Gary Smith. 2006. A great company can be a great investment. Financial Analysts Journal 62: 86–93. [Google Scholar] [CrossRef]
- Anginer, Deniz, Sattar Mansi, A. Joseph Warburton, and Celim Yildizhan. 2011. Firm Reputation and Cost of Debt Capital. Available online: https://mpra.ub.uni-muenchen.de/64965/1/MPRA_paper_64965.pdf (accessed on 31 January 2020).
- Antunovich, Peter, and David Laster. 1998. Are Good Companies Bad Investments? FRB of New York Staff Report. Available at SSRN. Available online: https://ssrn.com/abstract=163153 (accessed on 30 September 2018).
- Bacha, Sami, Aymen Ajina, and Sourour Ben Saad. 2021. CSR performance and the cost of debt: Does audit quality matter? Corporate Governance: The International Journal of Business in Society 21: 137–58. [Google Scholar] [CrossRef]
- Banerjee, Abhijit V., and Esther Duflo. 2000. Reputation effects and the limits of contracting: A study of the Indian software industry. The Quarterly Journal of Economics 115: 989–1017. [Google Scholar] [CrossRef]
- Beatty, Randolph P., and Jay R. Ritter. 1986. Investment banking, reputation, and the underpricing of initial public offerings. Journal of Financial Economics 15: 213–32. [Google Scholar] [CrossRef]
- Black, Ervin L., Thomas A. Carnes, and Vernon J. Richardson. 2000. The market valuation of corporate reputation. Corporate Reputation Review 3: 31–42. [Google Scholar] [CrossRef]
- Cahan, Steven F., Chen Chen, Li Chen, and N. Nguyen. 2014. The Business Press and Corporate Social Responsibility: Reputation, Cost of Capital, and Firm Value. Atlanta: American Accounting Association Annual Meeting Session, vol. 5. [Google Scholar]
- Calegari, Izabela Paranaíba, Rodrigo de Souza Gonçalves, André Luiz Marques Serrano, and Jomar Miranda Rodrigues. 2016. Efeitos da Reputação Corporativa no Custo de Capital Próprio em Empresas Brasileiras Listadas. Revista Universo Contábil 12: 178–98. [Google Scholar] [CrossRef]
- Cao, Ying, James N. Myers, Linda A. Myers, and Thomas C. Omer. 2015. Company reputation and the cost of equity capital. Review of Accounting Studies 20: 42–81. [Google Scholar] [CrossRef]
- Clarkson, Max E. 1995. A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review 20: 92–117. [Google Scholar] [CrossRef]
- de Quevedo Puente, Esther, Juan B. Delgado García, and Juan M. de la Fuente Sabaté. 2011. Financial impacts of corporate reputation. In Reputation Management. Berlin and Heidelberg: Springer, pp. 163–78. [Google Scholar]
- Delgado-García, Juan Bautista, Esther de Quevedo-Puente, and José María Díez-Esteban. 2013. The Impact of Corporate Reputation on Firm Risk: A Panel Data Analysis of S panish Quoted Firms. British Journal of Management 24: 1–20. [Google Scholar] [CrossRef]
- Demsetz, Harold. 1982. Barriers to entry. The American Economic Review 72: 47–57. [Google Scholar]
- Desender, Kurt A., Mónica LópezPuertas-Lamy, Barbara Petracci, and Pierpaolo Pattitoni. 2019. Corporate Social Responsibility and Cost of Financing—The Importance of the International Corporate Governance System. Available at SSRN. Available online: https://ssrn.com/abstract=4851562 (accessed on 18 December 2020).
- Diamond, Douglas W. 1991. Monitoring and reputation: The choice between bank loans and directly placed debt. Journal of Political Economy 99: 689–721. [Google Scholar] [CrossRef]
- Eberl, Markus, and Manfred Schwaiger. 2005. Corporate reputation: Disentangling the effects on financial performance. European Journal of Marketing 39: 838–54. [Google Scholar] [CrossRef]
- Fombrun, Charles, and Mark Shanley. 1990. What’s in a name? Reputation building and corporate strategy. Academy of Management Journal 33: 233–58. [Google Scholar] [CrossRef]
- Gomes, Armando. 2000. Going public without governance: Managerial reputation effects. The Journal of Finance 55: 615–46. [Google Scholar] [CrossRef]
- Góis, Alan Diógenes, Márcia Martins Mendes De Luca, Gerlando Augusto Sampaio Franco de Lima, and Jislene Trindade Medeiros. 2020. Corporate reputation and bankruptcy risk. BAR-Brazilian Administration Review 17: e180159. [Google Scholar] [CrossRef]
- Guo, Kun, Yuan Bian, Dayong Zhang, and Qiang Ji. 2024. ESG performance and corporate external financing in China: The role of rating disagreement. Research in International Business and Finance 69: 102236. [Google Scholar] [CrossRef]
- Hall, Ernest H., and Jooh Lee. 2014. Assessing the impact of firm reputation on performance: An international point of view. International Business Research 7: 1. [Google Scholar] [CrossRef]
- Hall, Richard. 1993. A framework linking intangible resources and capabiliites to sustainable competitive advantage. Strategic Management Journal 14: 607–18. [Google Scholar] [CrossRef]
- Himme, Alexander, and Marc Fischer. 2014. Drivers of the cost of capital: The joint role of non-financial metrics. International Journal of Research in Marketing 31: 224–38. [Google Scholar] [CrossRef]
- Houqe, Muhammad Nurul, Habib Zaman Khan, Olayinka Moses, and Arun Elias. 2024. Corporate reputation, cost of capital and the moderating role of economic development: International evidence. Meditari Accountancy Research 32: 1106–34. [Google Scholar] [CrossRef]
- Hyytinen, Ari, and Mika Pajarinen. 2007. Is the cost of debt capital higher for younger firms? Scottish Journal of Political Economy 54: 55–71. [Google Scholar] [CrossRef]
- Inglis, Robert, Clive Morley, and Paul Sammut. 2006. Corporate reputation and organisational performance: An Australian study. Managerial Auditing Journal 21: 934–47. [Google Scholar] [CrossRef]
- Kirca, Ahmet H., Whitney Douglas Fernandez, and Sumit K. Kundu. 2016. An empirical analysis and extension of internalization theory in emerging markets: The role of firm-specific assets and asset dispersion in the multinationality-performance relationship. Journal of World Business 51: 628–40. [Google Scholar] [CrossRef]
- Kuzey, Cemil, Amal Hamrouni, Ali Uyar, and Abdullah S. Karaman. 2024. Social reputation, loan contracting and governance mechanisms. International Journal of Accounting & Information Management 32: 502–31. [Google Scholar]
- Lee, Jooh, and James Jungbae Roh. 2012. Revisiting Corporate Reputation and Firm Performance Link. Benchmarking: An International Journal 19: 649–64. [Google Scholar] [CrossRef]
- Lev, Baruch Itamar. 2003. Remarks on the Measurement, Valuation, and Reporting of Intangible Assets. Available online: https://ssrn.com/abstract=788927 (accessed on 12 January 2015).
- Li, Hao. 2010. Reputation, accounting information and debt contracts in Chinese family firms. China Journal of Accounting Research 3: 95–129. [Google Scholar] [CrossRef]
- Maaloul, Anis, Daniel Zéghal, Walid Ben Amar, and Sari Mansour. 2023. The effect of environmental, social, and governance (ESG) performance and disclosure on cost of debt: The mediating effect of corporate reputation. Corporate Reputation Review 26: 1–18. [Google Scholar] [CrossRef]
- Magnanelli, Barbara Sveva, and Maria Federica Izzo. 2017. Corporate social performance and cost of debt: The relationship. Social Responsibility Journal 13: 250–65. [Google Scholar] [CrossRef]
- Milgrom, Paul, and John Roberts. 1982. Predation, Reputation, and Entry Deterrence. Journal of Economic Theory 27: 280–312. [Google Scholar] [CrossRef]
- Morales, C., Juan Pedro Sánchez Ballesta, and Emma García Meca. 2010. Exploring the Relation between Board and Cost of Debt: A Study of the Spanish Case. Facultad de Economia y Empresa, Working Paper. Murcia: Universidad de Murcia. [Google Scholar]
- Mukasa, Kayondo Denis, Hyunwoo Lim, and Kyungho Kim. 2015. How do corporate social responsibility activities influence corporate reputation? Evidence from Korean firms. Journal of Applied Business Research (JABR) 31: 383–96. [Google Scholar] [CrossRef]
- Nagasawa, Kenichi, and Akitoshi Ito. 2016. R&D Investments and Dividend Policies: Reputation or Flexibility? Available at SSRN 2870129. Available online: https://ssrn.com/abstract=2870129 (accessed on 12 January 2018). [CrossRef]
- Núñez, Georgina, Helvia Velloso, Héctor Lehuedé, Filipe Da Silva, and Laura Poveda. 2023. ESG Disclosure, Corporate Reputation and Financing Costs: Evidence from Latin America and the Caribbean (No. 68029.2). Santiago: Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL). [Google Scholar]
- Ojah, Kalu, and Justo Manrique. 2005. Determinants of corporate debt structure in a privately dominated debt market: A study of the Spanish capital market. Applied Financial Economics 15: 455–68. [Google Scholar] [CrossRef]
- Pfister, Benjamin. 2014. Corporate Reputation and the Cost of Equity Capital-An Empirical Analysis of German DAX30 Companies. Paper presented at the 2014 Global Marketing Conference at Singapore, Singapore, July 15–18; pp. 1362–63. [Google Scholar]
- Pfister, Benjamin, and Manfred Schwaiger. 2016. Assessing the Impact of Corporate Reputation on Firms’ Cost of Debt: An Empirical Study of German DAX 30 Companies. In Marketing Challenges in a Turbulent Business Environment. Cham: Springer, pp. 45–46. [Google Scholar]
- Pfister, Benjamin, Manfred Schwaiger, and Tobias Morath. 2020. Corporate reputation and the future cost of equity. Business Research 13: 343–84. [Google Scholar] [CrossRef]
- Piot, Charles, and Franck Missonier-Piera. 2007. Corporate Governance, Audit Quality and the Cost of Debt Financing of French Listed Companies. Communication Présentée au 28ème Congrès de l’Association Francophone de Comptabilité, Poitiers. SSRN Working Paper Series. Available online: http://ssrn.com/abstract=960681 (accessed on 26 December 2017).
- Podolny, Joel M. 1993. A status-based model of market competition. American Journal of Sociology 98: 829–72. [Google Scholar] [CrossRef]
- Raithel, Sascha, and Manfred Schwaiger. 2015. The effects of corporate reputation perceptions of the general public on shareholder value. Strategic Management Journal 36: 945–56. [Google Scholar] [CrossRef]
- Raithel, Sascha, Petra Wilczynski, Matthias P. Schloderer, and Manfred Schwaiger. 2010. The value-relevance of corporate reputation during the financial crisis. Journal of Product & Brand Management 19: 389–400. [Google Scholar]
- Razak, Noraznira Abd, Najihah Hanisah Marmaya, Mohd Zailani Othman, Idris Osman, Suhailah Kassim, Fatin Aqilah Maskuri, and Nik Kutina Mat Tahir. 2023. Capabilities and Reputation Risks Towards Firm Performance. Journal of Risk and Financial Management 16: 125. [Google Scholar] [CrossRef]
- Roberts, Peter W., and Grahame R. Dowling. 2002. Corporate reputation and sustained superior financial performance. Strategic Management Journal 23: 1077–93. [Google Scholar] [CrossRef]
- Rogerson, William P. 1983. Reputation and product quality. The Bell Journal of Economics 14: 508–16. [Google Scholar] [CrossRef]
- Rong, Xiyu, and Myung-In Kim. 2024. ESG and the Cost of Debt: Role of Media Coverage. Sustainability 16: 4993. [Google Scholar] [CrossRef]
- Rose, Caspar, and Steen Thomsen. 2004. The Impact of Corporate Reputation on Performance: Some Danish Evidence. European Management Journal 22: 201–10. [Google Scholar] [CrossRef]
- Sánchez, José Luis Fernández, and Ladislao Luna Sotorrío. 2007. The creation of value through corporate reputation. Journal of Business Ethics 76: 335–46. [Google Scholar] [CrossRef]
- Sánchez-Ballesta, Juan Pedro, and Emma García-Meca. 2011. Ownership structure and the cost of debt. European Accounting Review 20: 389–416. [Google Scholar] [CrossRef]
- Schwaiger, Manfred. 2004. Components and parameters of corporate reputation—An empirical study. Schmalenbach Business Review 56: 46–71. [Google Scholar] [CrossRef]
- Sengupta, Partha. 1998. Corporate disclosure quality and the cost of debt. Accounting Review 73: 459–74. [Google Scholar]
- Shefrin, Hersh, and Meir Statman. 1994. Behavioral capital asset pricing theory. Journal of Financial and Quantitative Analysis 29: 323–49. [Google Scholar] [CrossRef]
- Shefrin, Hersh, and Meir Statman. 1995. Making sense of beta, size, and book-to-market. Journal of Portfolio Management 21: 26–34. [Google Scholar] [CrossRef]
- Siegel, Jordan. 2005. Can foreign firms bond themselves effectively by renting US securities laws? Journal of Financial Economics 75: 319–59. [Google Scholar] [CrossRef]
- Srivastava, Rajendra K., Thomas H. McInish, Robert A. Wood, and Anthony J. Capraro. 1997. Part IV: How do reputations affect corporate performance?: The value of corporate reputation: Evidence from the equity markets. Corporate Reputation Review 1: 61–68. [Google Scholar] [CrossRef]
- Stuebs, Marty, and Li Sun. 2010. Business reputation and labor efficiency, productivity, and cost. Journal of Business Ethics 96: 265–83. [Google Scholar] [CrossRef]
- Tanin, Tauhidul Islam, Ashutosh Sarker, Shawkat Hammoudeh, and Jonathan A. Batten. 2024. The determinants of corporate cost of debt during a financial crisis. The British Accounting Review. in press. [Google Scholar] [CrossRef]
- Tischer, Sven, and Lutz Hildebrandt. 2014. Linking corporate reputation and shareholder value using the publication of reputation rankings. Journal of Business Research 67: 1007–17. [Google Scholar] [CrossRef]
- Tomak, Serpil. 2014. Corporate Reputation and Financial Performance of Firms in Turkey. Academic Review of Economics and Administrative Sciences 7: 289–309. [Google Scholar]
- Wang, Yijing, and Guido Berens. 2015. The impact of four types of corporate social performance on reputation and financial performance. Journal of Business Ethics 131: 337–59. [Google Scholar] [CrossRef]
- Wu, YiLin. 2011. Brand Reputation and the Cost of Capital: Evidence of Adopting a Brand Name as the Corporate Name. The Journal of Entrepreneurial Finance (JEF) 15: 29–63. [Google Scholar] [CrossRef]
- Zhang, Jean X. 2009. CEO Tenure and Debt: An Artificial Higher Order Neural Network Approach. In Artificial Higher Order Neural Networks for Economics and Business. London: IGI Global, pp. 330–47. [Google Scholar]
- Zhang, Ran, and Zabihollah Rezaee. 2009. Do credible firms perform better in emerging markets? Evidence from China. Journal of Business Ethics 90: 221. [Google Scholar] [CrossRef]
- Zhao, Xinlu, and Huixue Zhang. 2024. How does ESG performance determine the level of specific financing in capital structure? New insights from China. International Review of Financial Analysis 95: 103508. [Google Scholar] [CrossRef]
S. No. | Variable Name | Measurement and Symbol Used in the Study | Variable Type | Description |
---|---|---|---|---|
1. | Cost of debt | Kd = Interest/debt | Dependent variable | Interest paid during the year and total debt at the end of year extracted from ACE Equity. |
2. | Financial reputation | Financial reputation | Independent variable | Market capitalization, excess of market value of equity over book value of equity and shareholder return are used as a proxy (extracted from ACE Equity). |
3. | Financial performance | ROA | Control variable | Return on assets = Net profits after tax/assets (extracted from ACE Equity). |
4. | Debt equity ratio | DER | Control variable | Debt/equity (extracted from ACE Equity). |
5. | Current ratio | CR | Control variable | Current assets/current liabilities (extracted from ACE Equity). |
6. | Total assets | TA | Control variable | Total Assets in Rs. Crore (extracted from ACE Equity). |
7. | Ownership pattern | Institutional shareholding (ISH) | Control variable | Percent of shareholding in institutional hands (extracted from ACE Equity). |
8. | Market Risk | Beta | Control variable | Volatility in securities of a company in relation to the market (extracted from ACE Equity). |
9. | Interest coverage ratio | ICR = EBIT/Interest | Control variable | ICR expressed in percentage (extracted from ACE Equity). |
Variable | Mean | S.D. | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) | (9) |
---|---|---|---|---|---|---|---|---|---|---|---|
(1) Cost of Debt (Kd) | 0.88 | 8.86 | 1 | ||||||||
(2) Financial reputation | 10,216.29 | 29,167.88 | −0.01 | 1 | |||||||
(3) DER (in times) | 1.26 | 19.00 | −0.005 | −0.0073 | 1 | ||||||
(4) ROA (in percent) | 7.89 | 9.49 | −0.001 | 0.08 *** | −0.05 *** | 1 | |||||
(5) TA (in Rs. Crore) | 19,870.62 | 93,977.95 | 0.008 | 0.40 *** | 0.005 | −0.12 *** | 1 | ||||
(6) Beta | 0.84 | 4.29 | 0.004 | 0.013 | 0.003 | −0.01 | 0.02 * | 1 | |||
(7) ISH (in percent) | 19.44 | 15.37 | −0.01 | 0.26 *** | 0.005 | −0.01 | 0.15 *** | 0.05 *** | 1 | ||
(8) CR (in times) | 3.95 | 77.09 | −0.003 | −0.008 | −0.002 | −0.01 | −0.009 | −0.97 *** | −0.03 ** | 1 | |
(9) ICR | 127.86 | 674.56 | −0.01 | 0.11 *** | −0.01 | 0.18 *** | −0.02 * | −0.008 | 0.008 | −0.003 | 1 |
Variables | Model 1 | Model 2 | Model 3 | Model 4 | ||||
---|---|---|---|---|---|---|---|---|
Coefficient | Z Value (p-Value) | Coefficient | Z Value (p-Value) | Coefficient | Z Value (p-Value) | Coefficient | Z Value (p-Value) | |
Constant | −2.50 | −11.52 (0.00) | −2.63 | −11.58 (0.00) | −2.59 | −11.53 (0.00) | −2.04985 | −8.94 (0.00) |
Debt equity ratio | 0.0001 | 0.69 (0.49) | 7.87 × 10−5 | 0.51 (0.61) | 0.0001 | 0.67 (0.5) | 5.57 × 10−5 | 0.31 (0.76) |
Financial performance | 0.006 | 1.57 (0.11) | 0.007 | 1.67 * (0.09) | 0.006 | 1.61 (0.11) | 0.004745 | 1.16 (0.24) |
Log(Total assets) | 0.04 | 1.08 (0.27) | 0.05 | 1.65 * (0.10) | 0.04 | 1.4 (0.16) | −0.01594 | −0.44 (0.65) |
Beta | 0.11 | 1.99 ** (0.04) | 0.11 | 1.98 ** (0.04) | 0.10 | 1.92 ** (0.04) | 0.095007 | 1.74 * (0.08) |
Institutional shareholding | 0.002 | 0.67 (0.50) | 0.002 | 0.71 (0.47) | 0.004 | 1.14 (0.25) | 0.002877 | 0.75 (0.45) |
Current ratio | −0.01 | −1.47 (0.14) | −0.01 | −1.45 (0.14) | −0.002 | −0.38 (0.70) | −0.00131 | −0.15 (0.87) |
ICR | −0.0007 | −8.88 *** (0.00) | −0.0007 | −8.75 *** (0.00) | −0.0007 | −8.51 * (0.00) | −0.0007 | −7.85 *** (0.00) |
Financial reputation | −3.05 × 10−6 | −1.91 ** (0.05) | −1.86 × 10−6 | −1.11 (0.26) | −0.03913 | −1.76 * (0.07) | ||
R square | 0.2295 | 0.2440 | 0.2109 | 0.1475 | ||||
Wald chi2(7) | 88.01 *** | 91.53 *** | 84.70 *** | 70.16 *** | ||||
Prob > chi2 | 0.00 | 0.00 | 0.00 | 0.00 |
Disclaimer/Publisher’s Note: The statements, opinions and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s). MDPI and/or the editor(s) disclaim responsibility for any injury to people or property resulting from any ideas, methods, instructions or products referred to in the content. |
© 2024 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
Share and Cite
Kaur, A.; Joshi, M.; Singh, G.; Sharma, S. The Impact of Corporate Reputation on Cost of Debt: A Panel Data Analysis of Indian Listed Firms. J. Risk Financial Manag. 2024, 17, 367. https://doi.org/10.3390/jrfm17080367
Kaur A, Joshi M, Singh G, Sharma S. The Impact of Corporate Reputation on Cost of Debt: A Panel Data Analysis of Indian Listed Firms. Journal of Risk and Financial Management. 2024; 17(8):367. https://doi.org/10.3390/jrfm17080367
Chicago/Turabian StyleKaur, Amanpreet, Mahesh Joshi, Gagandeep Singh, and Sharad Sharma. 2024. "The Impact of Corporate Reputation on Cost of Debt: A Panel Data Analysis of Indian Listed Firms" Journal of Risk and Financial Management 17, no. 8: 367. https://doi.org/10.3390/jrfm17080367