How Inductive and Deductive Generalization Shape the Guilt by Association Phenomenon Among Firms: Theory and Evidence

Ivana Naumovska & Edward J. Zajac (2020) 'How Inductive and Deductive Generalization Shape the Guilt by Association Phenomenon among Firms: Theory and Evidence.' Organization Science, Forthcoming.

42 Pages Posted: 3 Nov 2020

Date Written: October 28, 2020

Abstract

This study advances and tests the notion that the phenomenon of guilt by association, whereby innocent organizations are penalized due to their similarity to offending organizations, is shaped by two distinct forms of generalization. We analyze how and why evaluators’ interpretative process following instances of corporate misconduct will likely include not only inductive generalization (rooted in similarity judgements and prototype-based categorization) but also deductive generalizing (rooted in evaluators’ theories and causal-based categorization). We highlight the role and relevance of this neglected distinction by extending guilt-by-association predictions to include two unique predictions based on deductive generalization. First, we posit a recipient effect: if an innocent organization falls under a negative stereotype that causally links the innocent firm with corporate misconduct, then that innocent firm will suffer a greater negative spillover effect, irrespective of its similarity to the offending firm. Second, we also posit a transmission effect: if the offending firm falls under the same negative stereotype, then the negative spillover effect to other similar firms will be lessened. We also analyze how media discourse can foster negative stereotypes, and thus amplify the two effects noted above. We find support for our hypotheses in an analysis of financial market reactions to corporate misconduct for all U.S. and international firms using reverse mergers (RMs) to gain publicly traded status in the U.S. We discuss the implications of our theoretical perspective and empirical findings for research on corporate misconduct, guilt by association, and stock market prejudice.

Keywords: corporate misconduct, guilt by association, generalization, stigma, organizational categories, stock market reactions, reverse mergers, Chinese firms

JEL Classification: G10, G30, G34, M41

Suggested Citation

Naumovska, Ivana and Zajac, Edward J., How Inductive and Deductive Generalization Shape the Guilt by Association Phenomenon Among Firms: Theory and Evidence (October 28, 2020). Ivana Naumovska & Edward J. Zajac (2020) 'How Inductive and Deductive Generalization Shape the Guilt by Association Phenomenon among Firms: Theory and Evidence.' Organization Science, Forthcoming., Available at SSRN: https://ssrn.com/abstract=3720622

Ivana Naumovska (Contact Author)

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore

Edward J. Zajac

Northwestern University - Kellogg School of Business ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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