2 - How the Legal System Affects Reputation

Summary

Chapter 1 revolved around the question of why similar behaviors lead to different reputational outcomes. This chapter suggests that a large part of the answer is the legal system. When stakeholders hear about a good or bad deed done by a company, they update their beliefs about the company’s quality and consequently update their willingness to interact with the company. But this process of belief revision – the process of reputational rewarding/sanctioning – does not operate in a vacuum. The legal system generates new pieces of information on the behavior in question and adds saliency and credibility to existing information. Stakeholders can then rely on the information that was generated by the legal system to reassess their beliefs about the company. In other words, the law dictates the market reaction.