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

Abstract

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

Naumovska, Ivana and Zajac, Edward J. and Lee, Peggy M., Strength and Weakness in Numbers? Unpacking the Role of Prevalence in the Diffusion of Reverse Mergers (January 10, 2020). Academy of Management Journal, Available at SSRN: https://ssrn.com/abstract=3783312

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

Peggy M. Lee

Arizona State University (ASU) - Management Department ( email )

Tempe, AZ 85287-4006
United States

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