Strength and Weakness in Numbers? Unpacking the Role of Prevalence in the Diffusion of Reverse Mergers
Academy of Management Journal
Posted: 10 Feb 2021
Date Written: January 10, 2020
A common prediction in research on practice diffusion is a “strength in numbers” effect (i.e., that a growing number of past adopters will increase the number of future adopters). We advance and test a theoretical perspective to explain when and how practice prevalence may also generate a “weakness in numbers” effect. Specifically, in seeking to explain the diffusion of reverse mergers (RMs) — a controversial practice that allows a private firm to go public by merging with a publicly listed “shell company” — we suggest that prevalence affected their diffusion in a complex way, based on two divergent social influence pathways, creating: (1) a direct and positive effect of practice prevalence on potential adopters, who view prevalence as evidence of the practice’s value, and (2) an indirect and negative effect, mediated through third-party evaluators (i.e., investors, and the media) who view prevalence as a cause for concern and skepticism. We also highlight the utility of this theoretical framework by analyzing how a decline in the status of past adopters exerts a negative effect on diffusion through both social influence pathways. Employing structural equation modeling techniques, we find support for the hypothesized relationships and we discuss the implications of the study for future research on practice diffusion.
Keywords: Diffusion, Controversial Practice, Reverse Mergers, IPO, Financial Markets, Bubbles, Institutional Theory, Structural Equation Modeling
JEL Classification: A14, G02, G34, N2
Suggested Citation: Suggested Citation