Asymmetry of Reputation Loss and Recovery

We formulate a dynamic investment model where investors can easily change firms (funds) and firms’ actions are subject to imperfect monitoring. We show that there is an asymmetry of fast reputation loss and slow reputation recovery, even without informational externalities. The key factor is endogenous relationships. It is easy to lose customers but it is not easy to get them back, because without an ongoing relationship, one’s belief is likely to be the same as the one at the time of separation. For recovery, new entrants or reputation loss of another firm is needed. We give empirical evidence, at the firm level, that asymmetry of investor movements exists and is likely to be caused by endogenous relationships.