• by Steve McClellan , March 16, 2012

In the social media age, where word of a company can spread instantaneously over the Internet, many firms have reevaluated their PR efforts. A New York research firm has completed a study that concludes that a public company’s reputation can account for a huge portion of its stock value. In the case of firms in the Standard & Poor's 500 Index, reputation currently accounts for an average of 31% of share price.

The firm, Echo Research, a unit of the UK’s Ebiquity, devised a formula that uses regression analysis to calculate the impact of numerous factors, including media exposure, financial analysis, intangibles, such as the general thoughts and feelings about a company throughout its industry, and corporate reputation measured by innovation and social responsibility.

According to the study, reputation accounted for more than half of the share prices of the top ten reputation leaders in 2011. 

Apple and Google were tied for the top spot last year in terms of the contribution that their reputations made to their share prices: 58% in both cases. Four other firms were right behind, including Exxon, McDonald’s, Walt Disney and IBM, all with a 57% contribution. Rounding out the top 10 were Nike (56%) and United Technologies, Procter & Gamble and Chevron, all with a 55% reputation contribution to the price of their shares.

At the other end of the spectrum, Echo calculated that Supervalu Inc.’s reputation was a 38% drag on the price of its shares. Sears Holdings, Office Depot, Coca-Cola Enterprises and Sprint Nextel Corp. also had reputation issues that cost them share value instead of adding to it.

“The bottom line is that corporate reputations are now underpinning investor confidence in companies’ ability to deliver the economic returns expected,” said Dan Soulas, managing director, Echo Research USA.

The financial crisis contributed significantly to the decline of corporate reputations generally, said Soulas.

On the flip side, a rise in the value of corporate reputation over the last four years has “laid the foundations for the share price recovery that we see today,” Soulas said. The Echo analysis shows that in the immediate aftermath of the 2008 market collapse, the average contribution of reputation to company value in the Standard & Poor’s 500 Index fell by 3 percentage points to 13%. Since then, it has grown steadily to the average 31% it represents today.

“What chief executives really want to know,” Soulas said, “is how corporate reputation can grow shareholder value.” The study concludes that a 5% improvement in the strength of corporate reputation of an S&P 500 company will deliver an increase in market capitalization of close to 3%.