The Consequences of Scandals on Organizational Competition
- Julien Jourdan
- Alessandro Piazza
We explore how the social media attention received by a firm implicated in a large corporate scandal affects the market value of its competitors. Existing work provides contrasted arguments and evidence regarding the spillover effects of scandals: rivals may suffer from contamination and at the same time benefit from substitution. Building on and extending prior work, we develop a stylized model to predict how contamination and substitution interact and jointly affect firms' value in a non-linear way during the course of a scandal. We test our model using unique data, including 1.2m tweets, on the Dieselgate scandal that affected the global automobile industry in 2015. We find evidence of an inverted-U shape relationship between social media attention and rival firms' value at the global scale, suggesting that substitution dominates on average. Yet the pattern is reversed for German and other European firms, primarily affected by contamination. We discuss how the study contributes to the literature on corporate scandal and disapproval, with implications for the understanding of the impact of social media on organizations.
Recent works have documented the dark side of scandals, revealing how they spread, contaminate associated organizations, and taint the perception of entire fields. We complement this line of work by exploring how scandals durably affect competition within a field, translating into relative advantages for certain organizations over others. First, scandals may benefit organizations that provide a close substitute to the offerings of the implicated organization. Second, scandals pave the way for moralizing discourses and practices, shake taken-for-granted assumptions about the conduct of organizations, and result in a shift in the criteria used to evaluate organizations within the field. Our arguments suggest that organizations whose offerings are most similar to those of the implicated organization, yet perceived as enforcing stricter standards of conduct, are likely to benefit the most from a scandal. We find support for these arguments in a county-level study of membership in the Catholic Church and sixteen other Christian denominations in the United States in the wake of a series of sex abuse cases perpetrated by Catholic clergy between 1971 and 2000. This study contributes to our understanding of the competitive effects of scandals on organizations, and carries important implications for the management of organizations in scandal-stricken fields.
In this article, we attempt to build a comprehensive theory of the intra- and inter-organizational effects of scandals. In so doing, we develop and test distinct mechanisms regarding the effects of scandals on: 1) the focal organization; 2) organizations similar to it (bystanders); and 3) all organizations sharing the same form. First, drawing on the social identity theory literature, we argue that the damage incurred by the focal organization due to scandals will be contingent on its size. Second, we develop and test two competing hypotheses regarding the effects of scandals on bystander organizations: contamination, whereby organizations that are similar to the scandal-struck one are cognitively assimilated and penalized, and substitution, which would predict that similar organizations would benefit from the penalties suffered by the focal organization. Finally, we contend that scandals—which we conceptualize as expressions of moral deficiency made public— generate a shift in evaluation criteria which will cause audiences to place a premium on organizations that display features running counter to the scandal’s core features. A county-level study of religious adherence to the Catholic Church and sixteen other Christian denominations in the United States in the wake of sex abuse cases perpetrated by Catholic priests between 1971 and 2000 provides empirical support for our theory.