Strategic Management Journal Strat. Mgmt. J., 23: 1077–1093 (2002) Published online 19 September 2002 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.274 CORPORATE REPUTATION AND SUSTAINED SUPERIOR FINANCIAL PERFORMANCE PETER W. ROBERTS 1 * and GRAHAME R. DOWLING 2 1 Graduate School of Business, Columbia University, New York, U.S.A. 2 Australian Graduate School of Management, University of New South Wales, Sydney, Australia Good corporate reputations are critical because of their potential for value creation, but also because their intangible character makes replication by competing firms considerably more difficult. Existing empirical research confirms that there is a positive relationship between reputation and financial performance. This paper complements these findings by showing that firms with relatively good reputations are better able to sustain superior profit outcomes over time. In particular, we undertake an analysis of the relationship between corporate reputation and the dynamics of financial performance using two complementary dynamic models. We also decompose overall reputation into a component that is predicted by previous financial performance, and that which is ‘left over’, and find that each (orthogonal) element supports the persistence of above-average profits over time. Copyright  2002 John Wiley & Sons, Ltd. A growing body of research argues that good corporate reputations have strategic value for the firms that possess them (Dierickx and Cool, 1989; Rumelt, 1987; Weigelt and Camerer, 1988). Acc- ording to a resource-based view, firms with assets that are valuable and rare possess a competitive advantage and may expect to earn superior returns. Those whose assets are also difficult to imitate may achieve sustained superior financial perfor- mance (Barney, 1991; Grant, 1991). Within this line of reasoning, intangible assets—such as good reputations—are critical because of their poten- tial for value creation, but also because their intangible character makes replication by com- peting firms considerably more difficult. Not sur- prisingly, several studies confirm the expected benefits associated with good reputations (Fom- brun and Shanley, 1990; Herremans, Akathaporn, and McInnes, 1993; Landon and Smith, 1997; Key words: reputation; persistent profitability; intangible assets *Correspondence to: Peter W. Roberts, Graduate School of Business, Columbia University, Uris Hall, 3022 Broadway, Room 703, New York, NY 10027-6902, USA. McGuire, Schneeweis, and Branch, 1990; Podolny, 1993). However, no research to date has looked at the extent to which a good reputation at a point in time allows superior financial performance to per- sist over time. In other words, they stop short of fully addressing ‘how firms get to be good [and] how they sometimes stay that way ’ (Teece, Pisano, and Shuen, 1997: 530, emphasis added). Barney (2001: 51) agrees that this is an important over- sight when noting that ‘the conditions under which resources developed or acquired in one period have implications for the strategic advantages of firms in subsequent periods — is particularly important.’ This paper fills this gap by examining the rela- tionship between reputation and the persistence of superior profit outcomes over time. The focus of this paper is on the impact of cor- porate reputation on the path of future financial performance. However, reputation research sug- gests that a reputation–performance effect may operate in both directions: a firm’s financial per- formance affects its reputation and its reputation affects its performance (McGuire et al., 1990). To accommodate this issue, our analysis accounts Copyright  2002 John Wiley & Sons, Ltd. Received 8 March 2000 Final revision received 23 May 2002