What it is:
Badwill is essentially damage to a company's reputation.
How it works (Example):
For example, let's assume that Company XYZ becomes aware that one of its factories in the Pacific Northwest is not structurally strong enough to withstand a mild earthquake. Three years after it obtains this information, there is a 6.2-magnitude earthquake. Like other buildings in the area, the factory crumbles and several workers are killed. After the incident, the media discovers that Company XYZ knew the building could not sustain such a hazard but did not make any effort to make the building safer. The company becomes the target of tremendous negative media attention, and the incident creates a considerable amount of badwill.
Why it Matters:
In financial markets, reputation has value. Good reputations attract and retain customers and investors; bad reputations do the opposite. Scandals and other events that damage reputations create badwill, which in turn reduces shareholder value.