Does a Corporate Crisis Affect Your Buying Habits?

June 12, 2019

Key Takeaways

If a company has a favorable reputation, its sales or stock are unlikely to be affected by a PR crisis. 

Remember in Spring 2018 when a Starbucks manager called the police after two black men asked to use the store’s restroom without making a purchase, and the men were arrested? Did it change your opinion of the coffee retailer, or would you chalk up the incident to a misunderstanding? 

Just how does a corporate crisis affect public perception of a company?

That’s what Haipeng (Allan) Chen, professor and Gatton College endowed chair in marketing, studied in his research titled “Well Known or Well Liked? The Effects of Corporate Reputation on Firm Value at the Onset of a Corporate Crisis,” published in the Strategic Management Journal in 2017.  
Chen’s research suggests that loyal customers may filter crises through rose-colored glasses while continuing to support the company. This often happens when the crisis is not the company’s fault (product tampering, for example). As a result, if the company is well-liked by the public, the stock price may not fall after a crisis, he said.

With fellow researchers Jiuchang Wei and Zhe Ouyang, Chen reviewed articles from the China Business News and the China Securities Journal published between 2008 and 2014 and located 126 corporate crises.

“With this limited sample, we found that the detrimental effect of corporate crises is magnified for firms that are well known, but muffled for firms that are well liked especially when a crisis cannot be blamed on the firms,” Chen said.

Their research has implications for how firms should use their marketing dollars, Chen said.

“Companies may not want to spend a lot of their resources on improving their recognition with the general public—because that carries a higher burden if a crisis happens,” he said. “Rather, companies should make sure that the stakeholders who know them like them a lot as this could help protect their stock price in the event of a crisis.”

This could include better communication about the cause of the crisis through a corporate press release, advertisements and social media. To improve their likability, companies should foster connections with their local community through promoting green consumptions, donating to families in need, or helping with disaster relief, he suggested.

After the “restroom” crisis, Starbucks CEO Kevin Johnson publicly apologized for the arrest and met with the two victims privately. It closed 8,000 stores for one afternoon to provide employee racial bias training. (After a public racial profiling accusation by R&B singer SZA, beauty retailer Sephora did the same on June 5, 2019). Since the crisis, Starbucks’ sales and stock price have seen healthy growth. 

Chen’s research has been published or accepted for publication in many journals, including the Journal of Consumer Research, Journal of Marketing, Journal of Marketing Research, Marketing Science, Management Science and Strategic Management Journal. He will co-chair the Behavioral Pricing Conference at Gatton in April 2020 for a special issue of the Journal of the Association for Consumer Research that he’s co-editing, and the Society for Consumer Psychology (SCP) Boutique Conference on Global Consumers in June 2020 in Singapore.

Well Known or Well Liked? The Effects of Corporate Reputation on Firm Value at the Onset of a Corporate Crisis

Authors:

Haipeng (Allan) Chen, Jiuchang Wei, Zhe Ouyang

Publication:

Strategic Management Journal

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