The Persistence of Lenient Market Labels
Elizabeth G. Pontikes
University of Chicago - Booth School of Business
William P. Barnett
Stanford Graduate School of Business
May 1, 2012
Chicago Booth Research Paper No. 12-60
Rock Center for Corporate Governance at Stanford University Working Paper No. 167
Research across disciplines presumes that markets will have strong boundaries. Markets without well-defined boundaries typically are not useful and do not become institutionalized, so are expected to fade away. In contrast, we suggest that in many contexts lenient markets or market labels with porous boundaries, persist and become important. This can be explained by looking at both market entry and market exit. Consistent with prior research, we suggest that lenient market labels offer less credibility than labels with strong boundaries, and so organizations will be more likely to exit these markets. At the same time, lenient market labels are more accepting of many different types of organizations. As a result, we expect lenient labels to also have high rates of entry. When entry rates are higher than exit rates, lenient markets will endure over time. We also predict that organizations exiting lenient labels will enter other lenient labels, which further fuels their persistence. Finally, this trend is exaggerated when influential external agents favor leniency. We find support for these ideas in a longitudinal analysis of organizational entry into and exit from market labels in the software industry.
Date posted: December 19, 2012 ; Last revised: February 9, 2015
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