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The Persistence of Lenient Market Labels

Posted: 19 Dec 2012 Last revised: 9 Feb 2015

Elizabeth G. Pontikes

University of Chicago - Booth School of Business

William P. Barnett

Stanford Graduate School of Business

Date Written: May 1, 2012

Abstract

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.

Suggested Citation

Pontikes, Elizabeth G. and Barnett, William P., The Persistence of Lenient Market Labels (May 1, 2012). Chicago Booth Research Paper No. 12-60; Rock Center for Corporate Governance at Stanford University Working Paper No. 167. Available at SSRN: https://ssrn.com/abstract=2191148 or http://dx.doi.org/10.2139/ssrn.2191148

Elizabeth G. Pontikes (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/elizabeth.pontikes/

William P. Barnett

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

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