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 organizational legitimacy affect economic value? Substitute or Complement?

Two Dimensions of Organizational Legitimacy That Affect Economic Value Market Legitimacy (ML) Social Legitimacy (SL) • Non-market actors : Value CSR • Market actors : Value firms’ future financial viability • Societal values : Health & safety, environmental sustainability, … • Market values : Profitability, growth, credit quality • Actors : Media (Bansal & Clelland, • Actors : Analysts (Certo, 2003) & 2004), regulators (Singh et al, 1986), advocacy groups (Rao, 1998), investors (Rao et al, 2001) insiders (Kostova & Zaheer, 1999) • Economic value: Attract financial • Economic value : Attract resources support (tax, employees, subsidies, regulations, customers, …). High SL Low SL Starbucks, Whole Foods, Wal-Mart Exxon, Toyota, BP, Wal-Mart High ML Social Enterprises, Fannie, Freddie Fannie, Freddie, AIG, GMAC, Enron Low ML

Focal Question: Does ML substitute SL? •  Economic Value = b 1  SL + b 2ML + b 3  SL * ML • What is the sign of b 3? – 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

(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 1 6 0 0 Social Legitimacy: 1 4 0 0 1 2 0 0 Sustainability & CSR 1 0 0 0 in the Media & % � In c re a se 8 0 0 Academia 6 0 0 4 0 0 2 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 -2 0 0 Ye a 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 � (B ):� M e d ia � a n d � A ca d e m ia � R e fe re n ce s � to � D JSI 6 0 0 0 Relevance of DJSI for SL DJSI: Media & Academia • Relevant criteria, 3 rd party audit 5 0 0 0 • Primary global sustainability 4 0 0 0 index since 1999 % � I n cr e a se 3 0 0 0 • Recognition in SRI (2010: 88 2 0 0 0 institutions, 16 countries, >$8b) 1 0 0 0 • Verification : Review & 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 interviews Y e ar � D JS I� in � M e d ia D JSI� in � A c a d e m ia

Financial Event Study: DJSI Additions & Deletions, 1999-2007 • Events (change in SL: a 1 ) : 268 additions (216 firms) & 150 deletions (133 firms) • DV : Beta excess returns (  EconomicValue = a 1 + a 2*ML ) – H1 (Add to DJSI): a 2 <0 – H2 (Drop from DJSI): a 2 > 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 TABLE 4. OLS Estimates of the Impact of Addition and Deletion from the DJSI on Firms’ Abnormal Stock Returns H1: Addition to DJSI H2: Deletion from DJSI (Increased SL) (Decreased SL) 4a 8a Constant 0.0344** -0.0129** Objective -0.00581** 0.00711** ML ( a 2) Subjective -0.0268*** 0.0366* ML ( a 2) Observations 267 150 R-squared 0.11 0.22 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)

When do the benefits outweigh the costs? � � High ML reduces gains from Low ML exacerbates losses add : Gain most from add if from drop : Lose most from drop both O-ML & S-ML low, gain if both O-ML & S-SL low, gain if nothing if both high, gain a bit both high, little impact if one is if one is high & the other low high & the other low

Economic Value: Net impact of additions & deletions by the DJSI Net gain : Low ML when added, High ML when dropped Small net gain : Similar ML when added & dropped Net loss : High ML when added, Low ML when dropped

Contributions Neo-Institutional Theory CSR Research • Different dimensions of • DJSI, robust methodology, legitimacy may substitute triangulation each other • Investors value CSR less • Subjective & objective when firms have alternative sources of market sources of legitimacy that legitimacy complement conform directly with values each other of market actors • Improve understanding • The costs of losing SL can of processes behind outweigh the benefits of evaluation of legitimacy gaining SL: If firms lose ML after being added

Appendix

Descriptive statistics and correlations