Living Up to Expectations: Corporate Reputation and Persistence of Firm Performance

I develop a theory of corporate reputation as a source of persistence in firm performance. I show how a relatively simple and reasonable assumption regarding the dynamics of corporate reputation leads to a self-reinforcing process whereby cross-firm differences in corporate reputation (and performance) are significant and relatively permanent. Numerical simulations suggest that persistence in cross-firm differences is largely due to endogenous investment incentives: firms with higher corporate reputations invest more in corporate reputation. I provide a series of examples consistent with the model’s prediction.