Ownership Structure, Reputation Crises and Recovery : Theory and Experiment

We model the repair of damaged corporate reputations through organizational structure reform. In a rational-choice framework our model explains the effects of the emergence and growth of the professional reputation-crisis management industry. The model produces two key conclusions: (a) Although, ex post, reputation repair can increase firm value, ex ante, the option to repair reputation dilutes the incentive to maintain reputation. (b) Separating ownership and control by delegating management to professionals can ameliorate this dilution. An experimental implementation of the model supports these conclusions and shows that they are robust to behavioral deviations from rational-choice behavior