The Impact of Ownership Structure on Corporate Reputation: Evidence From Spain

• Published date: 01 November 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00818.x
• Author: Juan Bautista Delgado‐García,Juan Manuel De La Fuente‐Sabaté,Esther De Quevedo‐Puente
• Date: 01 November 2010

The Impact of Ownership Structure on

Corporate Reputation: Evidence From Spain

Juan Bautista Delgado-García*, Esther de Quevedo-Puente, and

Juan Manuel de la Fuente-Sabaté

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: This study examines the inf‌luence of f‌irms’ ownership structure on corporate reputation.

Research Findings/Insights: Using archival data from a panel of f‌irms in Spain for 2000–2007, we found that ownership

concentration in the hands of the largest shareholder erodes corporate reputation, whereas contestability of the main

shareholder’s power enhances it. Insider ownership shows a non-linear relationship with corporate reputation, with lower

corporate reputation at low and very high levels of insider ownership. Finally, if the largest shareholder is either a

pressure-resistant or a pressure-sensitive institutional investor, as opposed to other types of largest shareholder, corporate

reputation is lower. This last f‌inding markedly differentiates our sample of f‌irms in Spain, a civil law country, from f‌irms in

common law countries such as the US and the UK, where studies have found a positive relationship between institutional

investors and corporate reputation.corg_818 540..556

Theoretical/Academic Implications: Drawing on signaling and agencytheories, our paper is, to the best of our knowledge,

the f‌irst to analyze the inf‌luence of ownership structure on corporate reputation in civil law countries.

Practitioners/Policy Implications: Thisstudy suggests that managers and directors should recognize how each characteristic

of ownership structure inf‌luences the expectationsof stakeholders. Low levels of ownership concentration in the hands of the

largest shareholders, low differences in ownership concentration between f‌irst and second largest shareholders, and

moderate levels of insider ownership are positive signals thatshould be communicated to foster corporate reputation. High

levels of ownership concentration in the hands of the largest shareholders or high differences in ownership concentration

between f‌irst and second largest shareholders impair corporate reputation and should be compensated by introducing

corporate governancemechanisms that favorcorporate reputation, such as increasing the number of independent directors or

avoiding CEO duality.

Keywords: Corporate Governance, Corporate Reputation, Ownership Structure, Spain

INTRODUCTION

There is a large body of research analyzing the inf‌luence

of ownership structure on f‌irm outcomes (e.g., Demsetz

& Lehn, 1985; Gedajlovic & Shapiro, 1998; Miguel, Pindado,

& Torre, 2004; Morck, Shleifer, & Vishny, 1988; Tribó,

Berrone, & Surroca, 2007). Among these outcomes, several

researchers have shown that ownership structure may affect

corporate reputation (Brammer & Millington, 2005;

Brammer & Pavelin, 2006; Fombrun & Shanley, 1990). The

analysisof the inf‌luence of ownership structure on corporate

reputation is relevant since corporate reputation inf‌luences

stakeholders’ responses toward the f‌irm. For instance, cor-

porate reputationaffects a customer’s choice among compet-

ing products (Akerlof, 1970), increases customer retention

(Caminity, 1992; Selnes, 1994) and premium price (Shapiro,

1983), makes the f‌irm an employer of choice (Stigler, 1962;

Williamson, 1985), reduces contractingand monitoring costs

because suppliers and partners are less concerned about

contractual hazards (Milgrom & Roberts, 1992); and also

supports new product introductions and recovery strategies

in the event of crisis (Dowling, 2001). In this sense, corporate

*Address for correspondence: Departamento de Economía y Administración de

Empresas, Facultad de CC.EE. y Empresariales, C/Parralillos s/n, 09001-BURGOS,

Spain. Tel:34-947-25-90-32; Fax: 34-947-25-89-60; E-mail: jbdelgado@ubu.es

Weare grateful to Pablo de Andrés, the participantsat the British Academyof Manage-

ment 2005 Conference, the 26th SMS InternationalAnnual Conference, and theACEDE

2008 Conference for their helpful comments. Data collection assistancefrom Roberto

Moisénis gratefully acknowledged.Special thanks to the editor, the associate editor and

the two anonymous reviewers. Any remaining errors are entirelyour responsibility.

540

Corporate Governance: An International Review, 2010, 18(6): 540–556

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00818.x

reputation affects a f‌irm’s future f‌inancialperformance (e.g.,

Roberts & Dowling, 2002; Vergin & Qoronf‌leh, 1998).

However, the few studies analyzing the inf‌luence of own-

ership structure on corporate reputation (Brammer & Mill-

ington, 2005; Brammer & Pavelin, 2006; Fombrun & Shanley,

1990) have focused only on common law countries and on

the impact of institutional ownership. Furthermore, they

have considered institutional owners as a homogeneous

group. Their evidence suggests three research issues that we

address below. First, we consider how this evidence applies

in civil law countries, where large blockholders have an

active role in corporate behavior.1Second, we argue that

ownership structure characteristics other than institutional

ownership also inf‌luence corporate reputation. Finally, since

different types of institutional investors may behave differ-

ently (e.g., Borokhovich, Brunarski, Harman, & Parrino,

2006; Brickley, Lease, & Smith, 1988; Kochhar & David, 1996;

Ruiz-Mallorquí & Santana-Martín, 2009), we examine how

different types of institutional investors may differently

inf‌luence corporate reputation.

The literature has provided several def‌initions of corpo-

rate reputation. Wartick (1992:34) def‌ined corporate repu-

tation as “the aggregation of a single stakeholder’s

perceptions of how well organizational responses are

meeting the demands and expectations of many organiza-

tional stakeholders.” Following similar arguments,

Fombrun (2002:9) proposed that “corporate reputation is

the collective representation of a company’s past actions

and future prospects that describes how key resource pro-

viders interpret a company’s initiatives and assess its

ability to deliver valued outcomes.” Finally, Waddock

(2000:323) proposed that reputation is the “organization’s

perceived capacity to meet its stakeholders’ expectations.”

These def‌initions show, f‌irst, that corporate reputation is

based on expectations about the ability of a f‌irm to satisfy

its stakeholders and, second, that it is built by the aggre-

gation of all stakeholders’ expectations.

Satisfaction of every stakeholder rests not only on the

fact that the f‌irm generates enough value, but also on a

balanced distribution of value among stakeholders (Char-

reaux & Desbrières, 2001; Jensen, 2001), since resources

expropriated by one stakeholder are not available to serve

the interests of the rest (Clarkson, 1995; John & Senbet,

1998). Because of information asymmetries, these stake-

holders use different informational cues or signals – e.g.,

f‌irm performance, size, or age – in order to generate their

expectations about the f‌irm’s ability to satisfy their inter-

ests (Brammer & Millington, 2005; Brammer & Pavelin,

2006; Fombrun & Shanley, 1990). Therefore, any character-

istic of the f‌irm that has been perceived as inf‌luencing

future expropriation within the f‌irm will serve as a signal

that affects corporate reputation.

These signals that stakeholders use to build their expecta-

tions are inf‌luenced by the institutional context (Gardberg &

Fombrun, 2006; Wright & Rwabizambuga, 2006). Thus one

may suspect that the surge of concern raised by corporate

scandals, the consequent interest in good governance as a

determinant of f‌irm behavior, and the more frequent pres-

ence and the relevance of large shareholders in civil law

countries (Faccio & Lang, 2002; La Porta, Lopez-de-Silanes,

& Shleifer, 1999; La Porta, Lopez-de-Silanes, Shleifer, &

Vishny, 1998; López de Foronda, López, & Santamaría, 2007)

have favored considering ownership structure as one of the

determinants of expectations about f‌irms’ future behavior.

This ability of ownership structure to generate expectations

makes it not only a corporate governance mechanism, but

also a factor inf‌luencing the accumulation of one f‌irm

resource – corporate reputation.

Drawing on agency theory (Jensen & Meckling, 1976) and

signaling theory (Spence, 1974), we providetheoretical argu-

ments and empirically analyze the inf‌luence of f‌irm owner-

ship structure on corporate reputation in Spain. We focus on

four characteristics of a f‌irm’s ownership structure that we

consider the most visible to stakeholders: degree of owner-

ship concentration in the hands of the largest and the second

largest shareholders; insider ownership – i.e., ownership in

the hands of executive and ex-executive directors; and the

type of the largest shareholder. By distinguishing among

different types of shareholders and by examining a civil law

country, our analysis complements previous research by

Fombrun and Shanley (1990), Brammer and Millington

(2005), and Brammer and Pavelin (2006), which has focused

only on the impact of institutional ownership in common

law countries.

Spain is an interesting setting for our study for several

reasons. First, Spain is a typical civil law country, with con-

centration of ownership in the hands of a few large block-

holders who are inf‌luential in organizational behavior

(Miguel et al., 2004; Tribó et al., 2007) and thus should have

a large and distinctive inf‌luence on stakeholders’ expecta-

tions. Second, in Spainbanks have traditionally maintained a

large presence in f‌irms, not only as creditors but also as

controlling shareholders (Ruiz-Mallorquí & Santana-Martín,

2009). This large presence of banks, also common in other

civil law countries, allows us to distinguish among different

types of institutional investors in our analyses. Third, during

the last decades the Comisión Nacional del Mercado de

Valores (Spanish National Stock Exchange Commission) has

introduced signif‌icant changes with the aim of promoting

transparency among quoted f‌irms (see the Olivencia Report,

1998; the Aldama Report, 2003; and the Code of Good Gov-

ernance, also known as the Conthe Code, 2006). These

advances have increased the information that quoted f‌irms

provide about their governance. Fourth, Spain has an index

of corporate reputation comparable to other measurements

analyzed in previous research. Finally, as Ruiz-Mallorquí

and Santana-Martín (2009) have indicated, these characteris-

tics of f‌irms’ ownership structure in Spain and the weakness

of its corporate control market imply that the conclusions

drawn from our study can be extended to other civil law

countries with similar governance characteristics.

The paper is structured as follows. In the next section we

explain how ownership structure conditions expropriation

in the f‌irm and how stakeholders’ perceptions of that struc-

ture build their expectations about the f‌irm’s capacity to

meet their interests. Then, we develop hypotheses relating

ownership structure to corporate reputation, in the sense

that characteristics that generate expectations of a higher

expropriation reduce corporate reputation, while those that

limit expropriation enhance corporate reputation. Our third

section describes the sample, variables, and methods; our

fourth reports the results. We conclude by discussing how

IMPACT OF OWNERSHIP STRUCTURE ON CORPORATE REPUTATION 541

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