Author: Matt Waldman


Apple store
Pfarrer’s research found that firms that were characterized as highly reputable or perceived to have a higher celebrity status, like Apple, experienced greater market rewards for “positive surprises” in their earnings and smaller market penalties fo

Tiger Woods and Conan O’Brien are examples of athletes and entertainers whose reputation and celebrity are intensified by a positive or negative reaction to a surprise event that plays out in the public eye. In today’s media centric society, these assets can be just as important in the business world, according to management professor Michael D. Pfarrer.

Pfarrer has drawn upon his background as a former investment consultant to ask important research questions about reputation and celebrity in the corporate arena and their impact on earnings. His paper, “A Tale of Two Assets: The effects of firm reputation and celebrity on earnings surprises and investors’ reactions,” co-authored with Timothy G. Pollock and Violina P. Rindova, is scheduled for publication in The Academy of Management Journal.

“There is a growing interest in intangible assets like reputation and celebrity in strategic and organizational research, but their specific effects on organizational outcomes remain poorly understood,” says Pfarrer.

He uses an analogy inspired by Aesop’s Fables to illustrate the distinction between reputation and celebrity as they relate to the study. Firms that bank on reputation are like the tortoise, he says, and firms that bank on celebrity are like the hare.

“Reputable firms generate good value over time with a reliable track record of success, while celebrity firms are willing to make splashes to get more initial media attention and generate a positive emotional appeal,” he says. Pfarrer and his colleagues compare the effects of these two intangible assets on the likelihood that a firm announces a positive or negative earnings surprise and how investors react to these surprises.

“Analysts, investors and the public want to be able to comfortably anticipate what is going to happen the next second, the next minute and the next day,” says Pfarrer, who worked for five years with an investment-consulting firm before deciding to pursue his PhD.

Pfarrer explains that this study brings a different filter for understanding market reactions than other disciplines, such as finance and accounting, which tend to look at the numbers involved in earnings surprises and how they affect a firm’s stock price.

“We look at the behavioral aspects that finance and accounting haven’t typically examined: When all else is equal, which firm characteristics may influence how investors react to surprises,” he says.

When Pfarrer and his colleagues compared firms with a strong reputation to firms with significant celebrity status, they discovered that highly reputable companies were less likely to announce positive surprises than firms that did not possess these intangible assets. In the same scenario, celebrity firms were more likely to announce positive earnings news.

More notably, the study found that both high reputation and high celebrity have their own rewards when it comes to earnings surprises. Firms characterized by high reputation or celebrity experienced greater market rewards for positive surprises and smaller market penalties for negative surprises than other firms.

“We think it is important because when a firm has a certain characteristic such as a high reputation then it may give them a mulligan because the investors will view it as an anomaly,” says Pfarrer.

And, he notes, a firm like Apple with its celebrity image for innovation can soften the blow of a perceived disappointment (the iPad) due to the built-up goodwill of a highly celebrated success (the iPhone).

“Apple is a classic example of a celebrity-type firm,” he says. “They do things that differ from expectations, industry norms and external observer norms, and innovation is a form of positive deviance. It’s not that Apple doesn’t have a reputation, but it has made a strategic choice to be more of a celebrity firm.” But Apple is the rare example of a firm with high celebrity and reputation at the same time.

Pfarrer says the research is beneficial for senior managers setting the strategic direction for a firm because it shows they need to make a conscious choice. “It is hard to allocate resources to build both, so there is a bit of a conundrum to choose which to build. A better answer is you should really focus on one of these versus none.”