By Benjamin Kessler, George Mason University
Image: Insaanu Studio - Unsplash
The capital of any business comes in (at least) two categories. There’s the kind that has a price—land, cash holdings, etc.—and a less tangible, priceless kind. Reputational capital falls squarely into the latter category. Try as they might, companies cannot buy positive public opinion, even with the largest of marketing budgets. But that doesn’t prevent some from engaging in dark marketing tactics, such as planting or buying fake “customer reviews” on influential platforms like Yelp and Amazon. Crossing that line can backfire if the company is caught. When its ethical lapses are brought to light, the company undergoes reputational damage, essentially auto-cannibalizing some of its intangible capital.
And that bite stings more, and for longer, than you might think, suggests a recently published working paper from Yi Cao, assistant professor of accounting at Costello College of Business at George Mason University. The research plumbs the financial consequences of flagged false reviews on crowdsourcing platform Yelp, a key reputational broker for local businesses throughout the United States.
The paper was co-authored by Sean Wang (formerly of Southern Methodist University), John Bai of Hong Kong Polytechnic University, and Chi Wan of San Diego State University.
To punish businesses that it deems guilty of gaming the customer-review system, Yelp places a prominent “Consumer Alert” banner on all of their associated listing pages. These are typically 90-day penalties. (As of 2023, more than 4,900 businesses had been disciplined on Yelp in this way.)
“We don’t know every signal Yelp uses to identify fake or paid-for reviews, but from what we know, Yelp relies substantially on reports from consumers and business owners,” says Cao. “There are also reports that they also have an algorithm running in the background to screen reviews for AI-generated language—which is a sign of possible review inflation.”
The researchers accessed Yelp data for the years 2019 to 2024—288,426 firm-month observations in all, including 16,837 observations of flagged firms and their demand-side peers, during the six months surrounding an alert. They analyzed this data-set alongside monthly foot traffic reports for the observed businesses from global location data firm SafeGraph. For some of the businesses, they were also able to obtain credit card transaction data through Consumer Edge, a customer intelligence company.
Cross-referencing these three data sources, the researchers traced the rise and fall of businesses fingered for false reviews. The general demand premium for businesses with a high proportion of four- and five-star reviews equates to about 2.9 percent more foot traffic than lower-reputation rivals in their local area. This difference in demand is one objective way to measure the material benefits of intangible capital.
“This is a classical theory of a trade-off between the benefits of manipulating reputation and the risks of getting caught,” says Cao. “When the risk is relatively low, the business owners decide the incremental benefits are worth the risk.”
Once publicly censured by the platform, however, businesses endured a surprisingly durable—and measurable—dip in demand. Almost immediately upon exposure, foot traffic went down by eight percent on average relative to matched peers, a stark indicator of reputational collapse that was mirrored in the credit card transaction data (an even better reflection of bottom-line outcomes). The decline was greater under conditions of so-called “intermediation intensity,” such as holiday periods when consumers were more reliant on the intermediary (Yelp) to help them plan their free time.
What’s more, the demand penalty outlasted not only the 90-day alert itself, but also (in many cases) the multi-year observation period of the research study. On the whole, foot traffic estimates for the censured group of businesses were still well below pre-alert levels even after a year and a half, implying recovery was nowhere on the horizon.
Part of the problem, the researchers found, is that the manipulated-review alert instantly degrades the informational environment on Yelp around that business. In other words, fewer reviews are posted, and those that do go up tend to be more negative on average. This makes it harder for businesses to rebuild their reputation by offering positive trustworthy signals.
For Cao, the research points to a basic conundrum that has worsened in the digital age: Once depleted, intangible capital is very difficult to restore. “Businesses nowadays heavily rely on digital platforms such as Yelp and YouTube,” he says. “Because the information reaches so many different corners, they are so widespread that you cannot ignore them. This increases not only the benefit of high performance, but also the reputational penalty if you are found manipulating your content.”
Fact-Checked by Irfan Ahmad.
Read next:
• Study Examines How Personality Traits Relate to Phubbing Behavior
• Can you teach yourself to detect AI writing? Maybe
Image: Insaanu Studio - Unsplash
The capital of any business comes in (at least) two categories. There’s the kind that has a price—land, cash holdings, etc.—and a less tangible, priceless kind. Reputational capital falls squarely into the latter category. Try as they might, companies cannot buy positive public opinion, even with the largest of marketing budgets. But that doesn’t prevent some from engaging in dark marketing tactics, such as planting or buying fake “customer reviews” on influential platforms like Yelp and Amazon. Crossing that line can backfire if the company is caught. When its ethical lapses are brought to light, the company undergoes reputational damage, essentially auto-cannibalizing some of its intangible capital.
And that bite stings more, and for longer, than you might think, suggests a recently published working paper from Yi Cao, assistant professor of accounting at Costello College of Business at George Mason University. The research plumbs the financial consequences of flagged false reviews on crowdsourcing platform Yelp, a key reputational broker for local businesses throughout the United States.
The paper was co-authored by Sean Wang (formerly of Southern Methodist University), John Bai of Hong Kong Polytechnic University, and Chi Wan of San Diego State University.
To punish businesses that it deems guilty of gaming the customer-review system, Yelp places a prominent “Consumer Alert” banner on all of their associated listing pages. These are typically 90-day penalties. (As of 2023, more than 4,900 businesses had been disciplined on Yelp in this way.)
“We don’t know every signal Yelp uses to identify fake or paid-for reviews, but from what we know, Yelp relies substantially on reports from consumers and business owners,” says Cao. “There are also reports that they also have an algorithm running in the background to screen reviews for AI-generated language—which is a sign of possible review inflation.”
The researchers accessed Yelp data for the years 2019 to 2024—288,426 firm-month observations in all, including 16,837 observations of flagged firms and their demand-side peers, during the six months surrounding an alert. They analyzed this data-set alongside monthly foot traffic reports for the observed businesses from global location data firm SafeGraph. For some of the businesses, they were also able to obtain credit card transaction data through Consumer Edge, a customer intelligence company.
Cross-referencing these three data sources, the researchers traced the rise and fall of businesses fingered for false reviews. The general demand premium for businesses with a high proportion of four- and five-star reviews equates to about 2.9 percent more foot traffic than lower-reputation rivals in their local area. This difference in demand is one objective way to measure the material benefits of intangible capital.
“This is a classical theory of a trade-off between the benefits of manipulating reputation and the risks of getting caught,” says Cao. “When the risk is relatively low, the business owners decide the incremental benefits are worth the risk.”
Once publicly censured by the platform, however, businesses endured a surprisingly durable—and measurable—dip in demand. Almost immediately upon exposure, foot traffic went down by eight percent on average relative to matched peers, a stark indicator of reputational collapse that was mirrored in the credit card transaction data (an even better reflection of bottom-line outcomes). The decline was greater under conditions of so-called “intermediation intensity,” such as holiday periods when consumers were more reliant on the intermediary (Yelp) to help them plan their free time.
What’s more, the demand penalty outlasted not only the 90-day alert itself, but also (in many cases) the multi-year observation period of the research study. On the whole, foot traffic estimates for the censured group of businesses were still well below pre-alert levels even after a year and a half, implying recovery was nowhere on the horizon.
Part of the problem, the researchers found, is that the manipulated-review alert instantly degrades the informational environment on Yelp around that business. In other words, fewer reviews are posted, and those that do go up tend to be more negative on average. This makes it harder for businesses to rebuild their reputation by offering positive trustworthy signals.
For Cao, the research points to a basic conundrum that has worsened in the digital age: Once depleted, intangible capital is very difficult to restore. “Businesses nowadays heavily rely on digital platforms such as Yelp and YouTube,” he says. “Because the information reaches so many different corners, they are so widespread that you cannot ignore them. This increases not only the benefit of high performance, but also the reputational penalty if you are found manipulating your content.”
Fact-Checked by Irfan Ahmad.
Read next:
• Study Examines How Personality Traits Relate to Phubbing Behavior
• Can you teach yourself to detect AI writing? Maybe
