Capability Reputation, Character Reputation, and Exchange Partners’ Reactions to Adverse Events

Abstract

To investigate when a firm’s reputation affects its exchange partners’ responses to adverse events, we distinguish between two types of reputation identified in prior work, capability reputation and character reputation, and present arguments for differences in their effects on exchange with potential and current exchange partners. Building on theory regarding uncertainty in exchange, we propose that potential exchange partners pay more attention to a firm’s capability reputation than its character reputation in the wake of adverse events. Thus, capability reputation has a buffering effect on relationship formation. In contrast, current exchange partners attend more to the firm’s character reputation than its capability reputation following adverse events. Hence, they are less likely to dissolve their relationships with organizations with high character reputations. Furthermore, we propose that the buffering effects of capability reputation and character reputation will be significantly reduced when the adverse events are caused by factors within the firm’s control. We find support for our arguments in an analysis of interstate gas transmission pipeline accidents in the United States from 2004 to 2013.

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