Short Summary: Companies pour millions into building a stellar reputation—but what if that reputation starts swinging wildly, like a rollercoaster? This study reveals that reputation instability—those unpredictable ups and downs compared to industry rivals—can seriously damage market performance. And here’s the twist: the hardest hits aren’t struggling firms, but the industry’s elite. High-reputation companies pay the steepest price for volatility, while low-reputation firms might just catch a lucky break from a little chaos. Further, industry context matters: in dynamic markets, instability can signal reinvention, but in stable ones, it spells trouble. The bottom line? Don’t just manage your reputation level—manage its stability. Smooth and steady wins for top firms; for others, a little chaos can be a lucky break.
Beyond the “Reputation Premium”
For decades, managers have been told that reputation is a golden asset—a stable, cumulative resource built through years of superior performance. Think Apple, Johnson & Johnson, or Merck. The logic seems straightforward: better reputation → higher market valuation.
But here’s the problem. This conventional wisdom assumes reputation is relatively stable. What happens when a firm’s reputation starts swinging wildly from year to year? Not clearly improving or declining, but simply bouncing around unpredictably?
In our new study published in the Journal of Management Studies, we show that reputation instability—erratic fluctuations in how stakeholders evaluate a firm—functions as a powerful market signal on its own. And its effects are often surprising.
The Hidden Cost of Being Unpredictable
Using 21 years of data across four major US industries (petroleum, pharmaceuticals, computers, and steel), we tracked how reputation instability—the extent to which a firm’s reputation fluctuates erratically over time relative to its industry peers—affects firm market performance (Tobin’s q).
The key finding? Reputation instability generally hurts market valuation. Investors dislike ambiguity. When a firm’s reputation bounces erratically, three types of confusion emerge:
- Causal ambiguity – Is this instability due to internal problems (poor management, scandals) or external forces (industry shifts, media narratives)?
- Trajectory ambiguity – Is the firm improving, declining, or just noisy?
- Stakeholder response ambiguity – How will customers, employees, and regulators react next time?
These ambiguities violate investor expectations that reputation should be a coherent, reliable signal. The result? Discounted valuations and cautious capital allocation.
The Reputation Paradox: High Fallers, Low Risers
Here’s where it gets counterintuitive. The penalty for instability is not uniform.
For high-reputation firms such as Johnson & Johnson and Apple (please refer to the paper for further details), instability is devastating. These firms have cultivated expectations of consistency and reliability. When their reputations start wobbling, investors experience negative expectancy violation—the instability falls far outside what’s considered acceptable. Even a little turbulence can trigger sharp sell-offs.
For low-to-moderate reputation firms, however, instability can actually be positive. Why? Because no movement signals stagnation. Erratic fluctuations might indicate the firm is experimenting, pivoting, or beginning to break free from entrenched negative perceptions. In these cases, instability creates positive expectancy violation—it challenges stale assumptions and hints at potential renewal.
Our data reveal a curvilinear effect: the relationship between reputation instability and market performance turns from positive (for low-reputation firms) to negative (for high-reputation firms).
Industry Context Matters Tremendously
Industry dynamism also reshapes how investors interpret instability.
In dynamic industries (pharmaceuticals, computers), investors expect turbulence. Rapid technological change, frequent innovation, and fierce competition make reputation swings normal. Causal ambiguity is often attributed to external factors, rather than to internal dysfunction. Consequently, instability is penalized less—or not at all.
In stable industries (steel, petroleum), however, investors expect predictability. Reputation should evolve slowly. Any erratic fluctuation triggers alarm bells, raising red flags about governance, operational stability, and strategic coherence. The penalty here is severe.
Practical Implications for Leaders
So what should executives do?
First, monitor reputation instability separately from reputation level. You might have a high current reputation but dangerously high instability—a fragility that investors will eventually price in.
Second, match your communication strategy to your reputation tier. High-reputation firms should prioritize consistency and rapid clarification when fluctuations occur. Low-reputation firms might strategically introduce controlled volatility through visible initiatives (new products, CSR campaigns, leadership changes) to signal renewal.
Third, calibrate expectations based on industry context. If you operate in stable industries, stability is paramount. In dynamic industries, occasional volatility is tolerated—but random, inexplicable swings still raise concerns.
Beyond Academia: A New Lens for Investors and Boards
For investors, our findings suggest looking beyond static reputation scores. Two firms with identical “good” reputations can have vastly different risk profiles depending on their reputation stability. A high-reputation but volatile firm might be riskier than a moderate-reputation stable one.
For board members, reputation instability should join financial volatility as a key risk metric. Ask management: Why is our reputation fluctuating? Can we trace the sources? Are we managing stakeholder expectations effectively?
For rating agencies and analysts, incorporating instability metrics could improve forward-looking assessments. Current reputational snapshots miss the crucial temporal dynamics that shape market confidence.
The Bottom Line
Reputation isn’t just about where you stand—it’s about how steadily you hold that ground. In an era of rapid information flows and shifting stakeholder expectations, managing reputation instability may become as important as managing reputation level. The firms that thrive will be those that understand not just their reputational position, but their reputational trajectory—and the signal that stability or volatility sends to the markets.
