Two Coins In One Purse? Olga Hawn (with Aaron Chatterji & Will - - PowerPoint PPT Presentation

Two Coins In One Purse?

Olga Hawn (with Aaron Chatterji & Will Mitchell)

• Organizational legitimacy (OL): Perception that the actions of a firm

conform with a socially constructed system of values (Suchman, 1995)

• OL affects economic value: success (Meyer & Rowan, 1977) & survival

(Ruef & Scott, 1998), access to resources (Dacin et al, 2007), new capital & market opportunities (Lounsbury & Glynn, 2001), human, financial & intellectual resources (Zimmerman & Zeitz, 2002), predictability (Bansal & Clelland, 2004)

• Multiple audiences with different values: Need a multi-dimensional

model of OL (Kraatz & Block, 2008, Ruef & Scott, 1998)

Question: How do different dimensions of

• rganizational legitimacy affect economic value?

Substitute or Complement?

Two Dimensions of Organizational Legitimacy That Affect Economic Value

Social Legitimacy (SL)

• Non-market actors: Value CSR
• Societal values: Health & safety,

environmental sustainability, …

• Actors: Media (Bansal & Clelland,

2004), regulators (Singh et al, 1986), advocacy groups (Rao, 1998), insiders (Kostova & Zaheer, 1999)

• Economic value: Attract resources

(tax, employees, subsidies, regulations, customers, …).

Market Legitimacy (ML)

• Market actors: Value firms’ future

financial viability

• Market values: Profitability, growth,

credit quality

• Actors: Analysts (Certo, 2003) &

investors (Rao et al, 2001)

• Economic value: Attract financial

support

High SL Low SL High ML Starbucks, Whole Foods, Wal-Mart Exxon, Toyota, BP, Wal-Mart Low ML Social Enterprises, Fannie, Freddie Fannie, Freddie, AIG, GMAC, Enron

Focal Question: Does ML substitute SL?

• Economic Value = b1 SL + b2ML + b3 SL * ML
• What is the sign of b3?

– Positive if market actors believe that more SL augments ML – Negative if market actors ML & SL substitute

–We predict negative: Substitution

• Institutional logic: Primacy & clarity of conformance

with the values of market & non-market actors –Primacy: ML directly conforms to values of market actors –Clarity: Changes in SL only indirectly conform with values of

market actors, via their judgments about how changes in SL will conform with values of social actors

Hypotheses: ML substitutes for SL

• 1. The lower the level of market legitimacy that a firm

possesses, the greater the gain in economic value from increased social legitimacy

• 2. The lower the level of market legitimacy that a firm

possesses, the greater the loss in economic value from decreased social legitimacy

• 2 0 0

2 0 0 4 0 0 6 0 0 8 0 0 1 0 0 0 1 2 0 0 1 4 0 0 1 6 0 0 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9

% In c re a se Ye a r

(A ): M e d ia a n d A c a d e m ia R e fe r e n c e s to S u s ta in a b ility a n d C S R

S u sta in a b ility in M e d ia C S R in M e d ia S u sta in a b ility in A ca d e m ia C S R in A ca d e m ia

• Social Legitimacy:

Sustainability & CSR in the Media & Academia

1 0 0 0 2 0 0 0 3 0 0 0 4 0 0 0 5 0 0 0 6 0 0 0 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 % I n cr e a se Y e ar

(B ): M e d ia a n d A ca d e m ia R e fe re n ce s to D JSI

D JS I in M e d ia D JSI in A c a d e m ia

• DJSI: Media & Academia

Relevance of DJSI for SL

• Relevant criteria, 3rd party audit
• Primary global sustainability

index since 1999

• Recognition in SRI (2010: 88

institutions, 16 countries, >$8b)

• Verification: Review &

interviews

Financial Event Study: DJSI Additions & Deletions, 1999-2007

• Events (change in SL: a1): 268 additions (216 firms) & 150

deletions (133 firms)

• DV: Beta excess returns (EconomicValue = a1 + a2*ML)

– H1 (Add to DJSI): a2 <0 – H2 (Drop from DJSI): a2 > 0

• IV: Market legitimacy

–Objective ML: Current financial performance (EBIT, ECO &

net income margins, ROA, ROE, ROC)

–Subjective ML: Analyst recommendations to buy

• Controls: Industry, geography, negative & positive news 14 months & 1

week before the event, size (employees), slack resources, regulated industry, R&D & advertising expenditures, vertical & horizontal diversification

• Descriptive stats: Substantial independence

Results: ML Substitutes for SL

Including controls for size (the number of employees), sector (basic resources, industrial, consumer vs. services), geography (North America and Other vs. Europe), media references (positive, negative 14 months before the event; positive, negative 1 week before the announcement)

TABLE 4. OLS Estimates of the Impact of Addition and Deletion from the DJSI on Firms’ Abnormal Stock Returns

H1: Addition to DJSI (Increased SL) H2: Deletion from DJSI (Decreased SL)

4a 8a Constant 0.0344**

• 0.0129**

Objective ML (a2)

• 0.00581**

0.00711** Subjective ML (a2)

• 0.0268***

0.0366*

Observations 267 150 R-squared 0.11 0.22

When do the benefits outweigh the costs?

• High ML reduces gains from

add: Gain most from add if both O-ML & S-ML low, gain nothing if both high, gain a bit if one is high & the other low Low ML exacerbates losses from drop: Lose most from drop if both O-ML & S-SL low, gain if both high, little impact if one is high & the other low

Economic Value: Net impact of additions & deletions by the DJSI

Net loss: High ML when added, Low ML when dropped Net gain: Low ML when added, High ML when dropped Small net gain: Similar ML when added & dropped

Contributions

Neo-Institutional Theory

• Different dimensions of

legitimacy may substitute each other

• Subjective & objective

sources of market legitimacy complement each other

• Improve understanding
• f processes behind

evaluation of legitimacy CSR Research

• DJSI, robust methodology,

triangulation

• Investors value CSR less

when firms have alternative sources of legitimacy that conform directly with values

• f market actors
• The costs of losing SL can
• utweigh the benefits of

gaining SL: If firms lose ML after being added

Appendix

Descriptive statistics and correlations