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The OCR Glossary

Reputational Discounting

Rumina Dhalla

Corporate reputations are considered to be a highly valuable asset critical to organizational success; negative reputations are thought to be the portent of organizational failure. Reputations are expected to influence purchase and other exchange decisions. Decision makers, however, not only select firms with strong positive reputations but also engage with firms with less favorable or negative reputations. Reputational discounting occurs when decision makers actively suppress or disregard the reputational information; that is, they overlook positively reputed firms or suppress negative reputations and engage with firms with unfavorable reputations. This entry examines the implications of and the explanations for reputational discounting.

What Are the Implications of Reputational Discounting?

The benefits of positive reputations are widely accepted in literature, and the consequences of negative reputations are prominently highlighted in the business press. Reputations are evaluated and measured by external parties such as reputation experts, business consultants, analysts, and news media. Firms are assessed and compared with others within accepted categorizations, for example, within sectors and industries, globally and nationally. The reputational information, largely available through reputational ratings and rankings, the accepted proxies for reputation, is signaled to audiences to help them assess whether to enter into an exchange relationship with the organization (e.g., as potential employees, consumers, suppliers, creditors, or investors).

Reputational rankings are designed to provide decision-making information about which company is considered to have the best reputation in a particular categorization (the one at the top) and which companies have a less favorable reputation (the ones at the bottom or possibly the ones that were not included in the ranking). Top-ranked companies are hailed as the best reputed and celebrated for their achievement. It is generally assumed that decision makers prefer to engage with firms with positive reputations.

If corporate reputation is an important factor in the selection process, as is argued in the literature, one would assume that decision makers would choose to engage only with firms with strong positive reputations and not engage in any transactions with organizations with negative reputations. This is not always the case; students choose to go to universities ranked less favorably than those at the top tier, consumers buy products with known faulty characteristics, drivers purchase cars from companies that have had numerous recalls, and many choose to consume products from companies associated with environmental spills, human rights violations, product safety issues, and other actions that are normally related to poor reputations. This is generally because they discount the reputational information available to them and substitute it with other factors.

Why Do Reputations Get Discounted?

There are a number of reasons why decision makers choose to discount reputations. Previous experience may be the predictor of future transactions; thus, a prior relationship with the firm may override reputational information. If decision makers have had prior favorable experience with the unfavorably reputed firm, they may opt to make this more salient than negative reputational information; a negative prior experience may lead to discount positive reputation.

Decision makers may also choose to heed their trusted advisers and ignore negative reputations. That is, if someone they trust had a positive or negative experience with a firm, the decision maker may decide to trust that information instead of the reputation of the firm. It is also possible that factors such as cost or availability of the product or proximity of the service are more salient. For example, job seekers may choose the closest employer rather than relocate. They might also choose to discount firm reputation if they disbelieve or mistrust the source of the information. Thus, information provided on a news story through a trusted source may influence the decision maker to discount the reputation of the firm being considered.

Alternatively, if the source of positive reputational information is considered biased, then the decision maker may discount the reputation. For example, a belief that reputation was manipulated may lead decision makers to discount the reputation. It is likely that an overabundance of information on reputation (e.g., repeated or multiple sources of rankings) may lead the decision maker to discount the reputation due to dilution or fatigue. Also, if there are multiple firms perceived similarly to be with negative reputations or positive reputations, then reputation may be discounted as the decision maker may assume that there is little difference among the providers. For example, if most automobile manufacturers had product recalls, the individual firm reputation may be discounted as all players may be considered to be alike. Product warranties can also lead to reputational discounting as the risk of product failure is mitigated. Finally, the cost or importance of the product may lead to reputational discounting; the reputation of a less expensive product or service may be discounted as the purchase is not considered valuable enough to the decision maker.

Conclusion

Firms must be aware that just because they are at the top of the rankings does not mean that decision makers will select them. On the other hand, reputational discounting provides potential opportunities to those firms with less favorable or negative reputations. Decision makers may actively overlook positive or negative reputations—that is, discount reputations.

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See Also

Categories; Corporate Associations; Familiarity; Prominence; Public Esteem; Ratings; Reputation Rankings

See Also

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