Terry College Research Finds Harm In A Good Reputation

New research from the University of Georgia – Terry College of Business has found that a good reputation could actually have a negative impact on business.

Research from Mike Pfarrer, associate professor management at Terry, was recently released in his paper “High-Reputation Firms and their Differential Acquisition Behaviors”, which was co-authored by Jerayr J. Haleblian from the University of California-Riverside and Jason T. Kiley from Oklahoma State University. The study was published in the Strategic Management Journal.

The paper examined the way, in addition to benefits like higher profits and better talent, public esteem from a high-regarded company can also create impossible-to-meet expectations. The paper looked to Fortune‘s list of “Most Admired Companies” to investigate any merger and acquisition behaviors that may have been influenced by a need to meet high expectations.

“We looked at about 1,400 firms over nearly 20 years and found that high-reputation firms take bigger risks in order to meet or exceed the expectations that investors put on them,” Pfarrer said of his findings. In particular, he cited the trajectory of a company like Google, which today is busy acquiring new companies like YouTube to help meet the growth and demand of their company. “At first organic growth is good enough for investors,” Pfarrer said. “But, eventually, to satisfy the ever-upward growth that the market demands, they have to start buying other companies because they can’t meet expectations organically anymore.”

Unfortunately, these moves to accommodate growth can often backfire as companies are pressured to take greater risks than normal. In contrast to other companies, high-reputation businesses were found to make twice as many acquisitions, including many firms that were actually less related to the business’ expertise. In many cases, the market will question their motives and penalize even highly-regarded firms for their risky moves.

According to Pfarrer, the lesson to be taken from his research may be to think twice about risky acquisitions; even if the move will seemingly help maintain growth, you may be punished for it in the long run.

regions: Atlanta

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