Organizations Non-Gratae? The Impact of Unethical Corporate Behavior on Interorganizational Networks

In this paper, we develop an integrated perspective on how legitimacy concerns affect organizational networks. We do this in the context of firms committing unethical acts. Using legitimacy theories and theories of the dynamics of status hierarchies, we hypothesize that network partner quality will decline and network structure will change after the commission of an unethical act, and the partner quality decline will be driven by higher quality firms leaving the network and lower quality firms taking their place. We further propose that the magnitude of network deterioration will be a function of the perceived illegitimacy of the act in question. We test these hypotheses using a sample of the 200 largest firms in the U.S. and data on unethical acts by these firms. Our results show that network partner quality declines after the commission of an unethical act, and the deterioration is generally larger for acts of greater illegitimacy. Our results also show a decline in network cohesion for firms involved in unethical activities. We discuss the results of this study for the literatures on interfirm networks and unethical activities