Corporate Reputation in Bond Market : Evidence from Lawsuits

How much does firm reputation matter in the public debt market? Using lawsuits that have an adverse effect on firm reputation, we find corporate bond prices react to lawsuit information. Litigated firms issue bonds with 4.9 percent higher yield spreads, 11-month shorter maturities, and $14.7 million less proceeds than non-litigated issuers. The reputation penalty, which correlates with case merit and outcome, is larger for private-owned firms and firms with headquarters in low-legal protection but high-social capital regions. Our evidence shows reputation matters in emerging markets as much as it does in the U.S. and how the institutional environment interacts with reputation mechanism in the market