INTRODUCTION

If a company takes an action that enhances its reputation, how does that action reflect upon other companies within the industry? For example, did Wal-Mart's announcement about its efforts to adopt 'green' policies (Carey, 2007) reflect positively upon other firms in the discount retail segment? Or, alternatively, did the announcement make Wal-Mart's competitors, such as Target and K-Mart now look less favorable for not explicitly having 'green' policies? Would the same dynamics apply when a firm experiences an event that harms its reputation, such as the Menu Foods (a private label pet food manufacturer) pet food recall (Hansell, 2007)? The reputation of national brands such as Purina (manufactured by Nestle) or Eukanuba (manufactured by Proctor & Gamble) might become more favorable compared to private label brands. On the other hand, the recall could make pet owners question the quality of all pet food manufacturers and threaten the reputation of the entire industry. These examples illustrate the importance of understanding how one firm's actions have resonant effects on the reputations of its rivals.

In this paper, we specifically examine the inter-organizational reputation effects of a controversial type of managerial action – the announcement of a permanent layoff. Layoffs may have positive or negative effects on a firm and on shareholder value. Layoffs can enable an organization to adjust to major environmental changes by reducing labor costs, eliminating unneeded levels of hierarchy (Love and Nohria, 2005) and streamlining operations (Freeman and Cameron, 1993). However, layoffs have been found to change survivors' attitudes toward their work, thereby compromising performance and morale (Brockner, 1990). Eliminating jobs and people disrupts organizational routines (Cameron et al., 1993) and can result in outcomes such as reduced creativity (Amabile and Conti, 1999), hindered new product development (Dougherty and Bowman, 1995) and compromised safety (Rinefort et al., 1998). Not only are such outcomes detrimental but also the financial cost savings from layoffs are often not as great as envisioned (Cascio et al., 1997) and the average shareholder reaction to a layoff announcement is slightly negative (e.g. Lee, 1997; Worrell et al., 1991).

Given these implications, a layoff announcement is likely to impact the reputation of the announcing firm in the eyes of critical constituents – such as shareholders, employees, suppliers and local communities. If other firms interact with the same set of constituents, one firm's announcement may also influence how stakeholders view non-announcing firms, that is, the competitors of the announcing firm. Intra-organizational reputational effects could be in the same direction as the announcing firm, in the opposite direction, or have no effect at all. We seek to understand these dynamics in this paper. We draw upon two theoretical streams of literature to answer our research question. These two perspectives address the inherent tension between cooperation and competition between firms (Astley and Fombrun, 1983) and provide a foundation to understand intra-organizational reputational dynamics and organizational field-level legitimacy.

The first perspective is Institutional Theory which suggests that organizations exhibit similar activities and structures in order to maintain legitimacy with important constituents (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). Shared cognitive values within an organizational field help to shape expectations about organizational actions (Rindova and Fombrun, 1999) and these expectations influence perceptions of reputation. Institutional Theory would predict that an individual firm's reputation is strongly influenced by the shared level of legitimacy within the organizational field in which it operates. In this instance, inter-organizational effects of an event that harms the reputation of the focal firm would also harm the shared legitimacy of the organizational field, and therefore harm the firm-level reputation of other organizational field members.

The other perspective is the resource-based view (or RBV) of the firm (Barney, 1991; Montgomery, 1995; Wernerfelt, 1984). RBV theory suggests that a firm's competitive advantage emanates from valuable, unique and rare resources that are in limited supply. A firm with these types of strategic resources can differentiate itself and achieve higher levels of profitability than competitors. Under RBV theory, reputation is a strategic resource –'Competitive advantage results from uniqueness, and uniqueness is measured by reputation' (Barnett, 2006: 275). Contrary to the institutional emphasis on field-level legitimacy, RBV emphasizes differences in firm-level reputations. While reputation is not necessarily in limited supply, its strategic value emerges when firms in an industry have varying levels of reputation (Deephouse, 2000). When an important group of stakeholders maintains a more positive reputation for a particular firm relative to others, this provides a competitive advantage to the firm. If other firms improve their reputation, this reduces the reputational difference and erodes the competitive advantage. In this way, a firm's reputation is influenced by the changes in the reputation of other firms.

We will first present our central theoretical argument that the stock price of a public firm reflects the firm's reputation in the eyes of shareholders. We then propose specific hypotheses relating to layoff announcements and their effect on the reputation of non-announcing firms with respect to shareholders. Our methodology, analysis and results using a sample of petroleum industry layoff announcements follow.

The theoretical framework and empirical evidence presented here deepen our understanding of the development and impact of firm reputation by explicitly demonstrating the field level of influences on firm reputation. Inter-organizational reputational effects emphasize the impact firm actions have on the entire organizational field through their effects on the perceptions of stakeholders. We are able to theoretically and empirically distinguish between the simultaneous cooperative and competitive forces that factor into reputation. In addition, from a managerial perspective, the extent and direction of inter-organizational reputational effects provides an incentive for firm leaders to contribute to efforts that increase the common reputation of the organizational field or industry.

THEORETICAL BACKGROUND

We begin our theoretical framework with the following operational definition of reputation, 'a collective representation of a firm's past actions and results that describes the firm's ability to deliver valued outcomes to multiple stakeholders. It gauges a firm's relative standing both internally with employees and externally with its stakeholders, in both its competitive and institutional environments' (Fombrun and Van Riel, 1997: 10). Three particular aspects of this definition can help us to conceptualize reputation from the perspective of shareholders.

The first important aspect of this concept is that reputation exists as a perception of stakeholders who are interested in a valued outcome. Stakeholders are defined as 'any group who can affect or is affected by the achievement of the firm's objectives' (Freeman, 1984: 25). The valued outcome implies that these stakeholders have a vested economic, emotional or political interest in the firm's activities and how it performs. As stakeholders, these constituents help to shape the norms and values that define legitimacy within an organizational field and exert an institutional influence upon firm behavior (Meyer and Scott, 1992).

While all stakeholders are necessary to enable the organization to function, shareholders play an especially vital role for publicly traded companies. Shareholders provide the necessary risk capital to enable the organization to continue operations. Formally, they are the owners of public corporations. As owners, shareholders are concerned not only with the firm's activities and performance, as are other stakeholders, but they are also concerned with the market value of the firm (and their investment in it) as reflected in the firm's stock price. Because they are interested in firm actions and outcomes, shareholders are motivated to pay attention to firm and industry activities to reduce the level of uncertainty inherent in predicting future firm performance and, hence, firm value.

The second inference from this definition of reputation is that representations are drawn from firm actions. Therefore, as described in the economic perspective of reputation, a firm's actions send signals to external stakeholders (Clark and Montgomery, 1998; Weigelt and Camerer, 1988). The case of shareholders fittingly illustrates this dimension of reputation. The separation of ownership and managerial control in most large public corporations leads to information asymmetries between managers and shareholders (Jensen and Meckling, 1976). Most shareholders do not have the benefit of the type of firm-specific and industry information that managers possess. Signaling theory (Akerlof, 1970; Spence, 1973) describes communication between two parties when information asymmetries exist. This theory poses that the party with superior information will convey a portion of their information through their actions. Consequently, managerial actions (such as dividend announcements, stock buy-backs, etc) convey information about the current state of the firm and managerial expectations for the future, above and beyond the information related to the action itself (Asquith and Mullins, 1986; Leland and Pyle, 1977). Shareholders use these cues to revise their perceptions and impressions about the company's future economic performance. In general, firm actions shape stakeholder impressions of reputation. In the case of shareholders, managerial actions inform impressions of firm value.

The third important dimension to the concept of reputation is that of relative standing. Given the institutional, macro-cognitive foundations of reputation (Rindova and Fombrun, 1999), reputation is not an absolute measure. Rather, the reputation of one firm has meaning only when compared to other firms (Shrum and Wuthnow, 1988). Organizational fields consist of sets of firms that fulfill a similar purpose, along with other stakeholders that interact with those firms as they carry out their missions (DiMaggio and Powell, 1983). Through the iterative quest for institutional legitimacy, an organizational field becomes infused with norms, shared values and common expectations (Fombrun, 1996). Because these shared values are shaped by the cumulative effect of other field participants, a firm's reputation is relevant only in comparison to other organizations involved in the same organizational field.

Firm value, like reputation, reflects the standards and norms of the organizational field. Financial markets as institutions include socially constructed collective perceptions, values and norms (Fligstein, 1996). These social influences from the macro-environment are ultimately incorporated into the market price of a stock (Zajac and Westphal, 2004). In order for the financial market to assign a value to a firm, shareholders must first create a meaning for the firm and understand its line of business. Judgments about the attractiveness of the firm's products and services, comprehension of the underlying business model of the firm, cognitive interpretations of the competitive field and opinions about managerial effectiveness are all factored into the value of a stock. By drawing upon the norms, values and strategic paradigms of a familiar organizational field, shareholders are able to use their knowledge and experience with that organizational field to assess the value of a particular firm. Theoretically this explains findings that link firm reputation to stock price performance (Chauvin and Guthrie, 1994; Herremans et al., 1993; Vergin and Qoronfleh, 1998).

In summary, we suggest that shareholders with a vested or potential interest in firm outcomes look to managerial signals to determine the future of a firm's underlying economic performance in comparison to relevant competitors. The similarity between the general reputation formation process and the firm valuation process leads us to propose using stock price as the aggregate measure of the reputation of a firm in the eyes of existing and potential shareholders. Using this conceptualization, in the next section we specifically explore the ways in which changes in one firm's reputation (as reflected in its stock price) may influence the reputation (and market value) of other firms.

INTRA-INDUSTRY INFORMATION FLOWS AND FIRM REPUTATION

In order to conceptualize the inter-organizational aspects of reputation, we must consider the comparative nature of reputation and firm value. Stakeholders consider the action signals of firms closely related to the ones they own. It is through the information content of the actions of relevant others that reputation has an inter-organizational component. An announcement of an action by one firm not only conveys information about the announcing firm but also sends signals about industry economic and environmental conditions that could impact the value of other industry firms as well. In the accounting and finance literatures, the term 'information transfers' is used to indicate the extent to which one firm's action influences the market value of other firms. 'Information transfers occur if announcements made by one group of one or more firms contemporaneously affect the returns to shares of another group of one or more non-announcing firms' (Schipper, 1990: 97). Information transfers expand the significance of a particular event beyond the focal firm and have been demonstrated to exist for managerial actions such as earnings announcements (Foster, 1981), bankruptcy (Lang and Stulz, 1992), drug withdrawals (Ahmed et al., 2002) and new product introductions (Zantout and Chaganti, 1996). When considering reputation from the perspective of shareholders, in our view, information transfers signify the extent to which inter-organizational reputational effects are present.

Two different simultaneous influences determine whether inter-organizational reputation effects are positive or negative. On the one hand, firms are in competition for limited resources in factor markets (e.g. labor markets) and for customers in the product markets. Simultaneously, they are jointly subject to the same conditions and requirements from the technical and institutional environment. When considering information transfers, these two competing influences can result in competitive effects or contagious effects (Lang and Stulz, 1992). Empirical evidence of information transfers associated with layoff announcements is somewhat contradictory (Madura et al., 1995; Sun and Tang, 1998). These contradictory findings emanate from this duality and provide the basis for our first set of hypotheses.

Competitive and Contagious Effects

In order to survive, a firm needs resources such as labor, physical assets and financial capital in order to satisfy customers. Since all of these key resources are in limited supply, firms in the same industry must compete for employees as well as investors in their efforts to compete for customers (Barney, 1986). When competition is the dominant mode of interaction, information flows within a group of rivals are in the opposite direction of the announcing firm. For example, Madura and colleagues (Madura et al., 1995) find that banks making layoff announcements experience negative shareholder reactions. In contrast, portfolios of rival banks increase in value following the layoff announcement of a competitor. Alternatively, if a managerial action is viewed positively by shareholders, as in the case of new product announcements (Zantout and Chaganti, 1996), it is viewed as a competitive disadvantage for rival firms who experience a negative effect on their share price. Each new product announcement by one firm implies that the first mover advantage will accrue to the announcing firm, precluding other firms from gaining such an advantage and putting them at a competitive disadvantage (Zantout and Chaganti, 1996).

If a firm announces a layoff, the competitive view suggests that the layoff announcement conveys negative information about the company implementing the layoff. This reduces its reputation in the resource factor markets (for labor and investors). It signals a limit in its ability to deliver valued outcomes to stakeholders. The tarnished reputation of the announcing firm improves the relative reputation of rival companies. These competitive effects motivate the first of our two competing hypotheses

Hypothesis 1a:

Non-announcing firms within an industry will experience intra-industry information transfers in the opposite direction of the market reaction to the announcing firm.

A firm's portfolio of resources is central to its ability to satisfy all of its stakeholders including customers and investors. Collections of firms with resource similarities can be used to define the boundaries of an industry or organizational field (Hofer and Schendel, 1978). Because of their resource similarities, firms in the same industry are subject to the same technical and institutional environmental influences. This shared exposure to the environment provides another mechanism through which inter-organizational reputational effects can flow.

As we noted above, the separation of ownership and control between shareholders and managers in large public corporations creates a state of information asymmetry (Jensen and Meckling, 1976). A layoff announcement may indicate problems with the focal firm. However, this action may also reveal private information and managerial assumptions about future conditions in the industry as a whole. In other words, a layoff announcement could signal industry-level information, such as a negative forecast for future demand, increasing commodity prices, potential regulatory changes or new market entrants. The effects of these types of environmental changes extend beyond the announcing firm. They also impact the entire industry because they change the shared perceptions held by industry managers and stakeholders. Consequently, a layoff announcement may signal that other firms with similar resource allocations may soon face an increasingly hostile business environment and this information would affect shareholder's expectations of the non-announcing firm's ability to operate successfully in the future and thereby alter the firm's value.

Therefore, the contagion model would predict that the reaction for non-announcing firms would be in the same direction as the reaction for the announcing firm. If shareholders react negatively to the layoff announcement of one firm, the market value and reputation of non-announcing rival firms would also decline. This leads to the second of our competing hypotheses:

Hypothesis 1b:

Non-announcing firms within an industry will experience intra-industry information transfers in the same direction of the market reaction to the announcing firm.

Organizational Field Structural Influences

Early in a wave of layoffs, the motivation for a layoff may be interpreted as company specific, such as poor management or a faulty strategy. Subsequent layoff announcements may shift the focus of shareholders to an external cause such as an economic slowdown or industry seasonality. While once viewed as acts of desperation, after multiple announcements, layoffs become a necessary action. This increased legitimacy reduces the negative image layoffs have traditionally carried with shareholders (Budros, 1997). As each additional layoff legitimizes this action by managers, shareholders may attribute a greater proportion of the cause to industry-level conditions. Layoffs motivated by industry factors will have a greater impact on other firms in the industry than will layoffs motivated by idiosyncratic conditions within the announcing firm.

Therefore, the prevalence of layoff announcements influences the relative strength of competitive and contagious effects over time. Early in a wave of layoffs, the announcement may be viewed more as an idiosyncratic firm problem. In this case, competitive effects are likely to dominate. However, as more companies announce layoffs, more of the problem may be attributed to the industry, and through contagion, all firms will be negatively affected by each subsequent announcement. This would lead to a negative impact on the reputation of rivals as prevalence of layoffs increases.

Hypothesis 2:

Increasing layoff prevalence will lead to negative information transfers.

Markets naturally have leaders and followers. Leadership or prominence can be defined in a variety of ways. Larger companies are often viewed as market leaders (Fligstein, 1990). Their actions are more visible, attract more media coverage and are more likely to be noticed by shareholders (Rao et al., 2000). Companies can be considered prominent to the extent they most closely follow the defining strategy of the group (Peteraf and Shanley, 1997). Prominence can also be achieved through a firm's connections with organizations that are considered prominent or of high status (Stuart, 2000) or via endorsements from industry experts or authorities (Rindova et al., 2005).

Because a prominent firm may be considered to be a leader and more closely represent the paradigm of an industry or organizational field, prominence can influence the magnitude of inter-organizational reputational effects. We contend that information contained in an announcement from a prominent firm would be more likely to be viewed as reflecting industry-wide information rather than being idiosyncratic to the firm. Such an announcement, therefore, should have greater inter-organizational effects than one from an obscure firm. For example, if a very small oil producer experienced a tanker accident, this news would more likely reflect on the company rather than on the industry as a whole. Contrast this with the Exxon Valdez accident. The details of tanker operating procedures revealed by this accident seriously hurt the reputation of Exxon. At the same time, they also raised doubts about the extent of potential problems existing in tankers throughout the oil industry (Glasgall and Cahan, 1989). If an industry leader such as Exxon maintained such low standards, what might the public expect from the industry as a whole?

Therefore, a layoff announcement by a prominent firm would have a greater effect upon the reputation of other firms. We expect that the prominence of the announcing firm will influence the magnitude of the information transfers resulting from a layoff announcement.

Hypothesis 3:

More prominent announcing firms will create greater information transfers.

Reputation is often considered as a relative measure and thus can only be considered in comparison to other firms competing within the same industry (Carter and Ruefli, 2006). However, companies are not uniform within industries. Firms exhibit various resource allocation patterns and strategies that result in sub-groups of firms within an industry (Cool and Schendel, 1987; Hunt, 1972). Greater overlap in product market coverage increases the competitive dimension of industry sub-groups (Young et al., 2000) as well as the strength of shared strategic group cognitive perceptions and norms (Porac et al., 1989; Reger and Huff, 1993). The presence of industry sub-groups means that some industry firms can experience stronger information transfers than others, depending upon how similar they are to the announcing firm.

We propose that inter-organizational reputational effects would be greater within sub-groups of an industry. Given that reputation is considered in comparison to other firms, the more firms are viewed to be subject to the same technical and institutional environmental demands, their reputational comparability will be stronger. This comparability increases the likelihood that the information signals sent by one firm's actions will be viewed as relevant to the value of another firm. For example, we would speculate that the information transfers between Mobil and Chevron, two large international integrated petroleum producers, would be greater than between Mobil and Holly Corp, a smaller petroleum refining and marketing firm. Therefore, we would hypothesize that the strength of information transfers is likely to be greater when the announcing firm is viewed as a close competitor. Stated another way, as the comparability between rivals decreases, so too will the information transfers.

Hypothesis 4:

Information transfers will decrease as the degree of rivalry between two firms decreases.

METHODS

Research Context, Sampling Method and Time-Frame

Several characteristics of the petroleum industry in the late 1980s and early 1990s make it an ideal setting and time-frame to test our proposed hypotheses. Given the capital intensive nature of the exploration, production, refining and marketing of petroleum products, the industry consists of a relatively stable set of major firms. This stability facilitates the development of industry norms and paradigms that are understood by the firms as well as major stakeholders. They provide a way to comprehend the performance and environmental risks inherent in petroleum operations. Given the strategic importance of their product and the high level of uncertainty inherent in future performance, reputation is important in this industry. Because stakeholders form perceptions of reputations from accumulated actions, petroleum industry managers actively engage in managing their reputations through their actions. Recently, ChevronTexaco's CEO 'challenged oil and natural gas companies to work together to improve the industry's reputation' (Oil & Gas Journal, 2003: 41) One example of firm-level efforts to manage reputation in the energy sector was seen following the Exxon Valdez oil spill. Companies increased their environmental disclosures in proportion to the company's ownership in the Alaskan pipeline (Patten, 1992). In another example, oil companies made discretionary write-offs during times of high crude prices. These reduced excessive profits and reduced the likelihood of price-gouging accusations (Hall, 1993).

The study time-frame (1989–1996) was a difficult period in the relationship between petroleum companies and shareholders. As seen in Figure 1, the industry experienced a 15-year period of relatively high crude prices in the 1970s and mid-1980s. During this time of extraordinary profits, oil companies undertook unwise diversification efforts. Some were energy related, such as Unocal's shale oil operations. Others, however, diversified into unrelated industries such as Mobil's acquisition of Montgomery Wards and Exxon's foray into office products. These proved to be unwise investments. However, the high crude prices of the 1970s had enabled managers to hide weak performance and still generate satisfactory shareholder returns. In 1986, crude prices fell dramatically, from $26.75 in December 1985 down to $14.55 one year later, a 46 per cent drop. In addition to the dramatic fall, prices remained low beyond the usual seven-year industry cycle.¹ This situation left oil company managers with many projects that were no longer viable. This period coincided with increasing shareholder power among publicly held oil companies (Abolafia, 1996). As a result, cost competitiveness, profit margins and relative performance became evaluative dimensions for shareholders and would influence the reputation of companies within the financial community.

Figure 1.

Historical crude oil prices

Full figure and legend (92K)

These trends led to industry-wide reductions, redirection, reorganizations and restructurings. Companies engaged in a variety of cost-cutting activities and strategic redirection, yet this time period was prior to the wave of large mergers that occurred in the late 1990s and early 2000s as well as the Enron scandal that further damaged the reputation and credibility of managers in the energy sector. This time-frame also coincides with extensive downsizing in many industries, possibly reflecting a change in the negative perception shareholders traditionally held towards layoff announcements (Chatrath et al., 1995).

The initial sample was obtained from the 1996 Oil & Gas Journal list (hereafter referred to as the OGJ200) of the largest oil and gas companies (Beck and Bell, 1996). Companies remained in the sample if their primary business was in one of the following petroleum-related SIC codes: 1311, 1381, 1382, 2911 and 5172. Companies were excluded if they were headquartered outside the United States or if we were not able to obtain complete data for the company. Sixteen non-OGJ 200 companies were added to the sample because they were named as rivals by the sample companies. The resultant sample consisted of 57 companies. These companies account for a significant proportion of US petroleum business, comprising 86 per cent of the total assets and 90 per cent of the total revenues of the domestic companies included in the 1996 OGJ200 (excluding BP and Shell). Sample firms with the number of layoffs announced for each firm are listed in Table 1. Firms without layoffs are listed in Table 2.

Table 1 - Sample companies with layoffs.

Full table

Table 2 - Sample companies without layoffs.

Full table

Layoff Information

Indications of a layoff were obtained from permanent domestic layoff announcements in major newspapers and trade journals. The announcement date was recorded as the date of the earliest article that specified an exact number of employees the company intended to layoff or had already laid off. Most layoff event studies include layoff announcements of any size. A few studies have limited their samples to layoffs greater than 1,000 employees (Hahn and Reyes, 2004) or greater than 0.5 per cent of employees (Nixon et al., 2004). We selected 1 per cent as the cut-off for inclusion in the sample. This level screens out layoffs that may be so focused that they do not have a great impact on the company, its strategy or its competitive position.

Model

We model shareholder returns using an OLS regression model and estimated the model using SPSS:

where AR=Abnormal Returns, AFR=Announcing Firm Returns, PREV=Prevalence, SIZE=Announcing Firm Size, RIV=Level of Rivalry, CON=Controls, i represents non-announcing firms, j represents announcing firms and t represents a layoff announcement at time t. Cases are excluded where i=j.

Dependent Variable

Abnormal returns for non-announcing firms

An event study methodology (Brown and Warner, 1985; Fama, 1969) was used to measure shareholder reactions. While event study abnormal returns have been used in reputational research as a dependent variable (Houston, 2003), we use announcing firm reactions as one of our independent variables. For our dependent variable, we are interested in the reactions for the non-announcing firms. Therefore, to measure information transfers, we obtained abnormal returns for the non-announcing firms on the date of each layoff announcement. Previous layoff event studies use a variety of different event windows. Inherent in any event study of layoff announcements is the challenge of meeting the unanticipated event assumption (McWilliams and Siegel, 1997) given that companies vary in how gradually they reveal their plans to layoff employees. We selected two event windows: one-day (-1, 0) and ten-day (-5, 5). The narrower window enables us to capture the immediate reaction, while the longer window enables us to relax the assumption of strong market efficiency without also including too many other competing events within the event window. To determine the extent of abnormal returns, the intra-industry reactions are compared to a portfolio of companies with a similar market value over a 300-day (-320, -21) time period. Several methods exist to determine the comparable portfolio; however, different methods do not have significantly different results over a seven-year time period (Hahn and Reyes, 2004). The abnormal and cumulative abnormal returns were obtained using the UC_EVENT program.

Independent Variables

Abnormal returns for announcing firms

The same event study methodology is used to calculate the abnormal and cumulative abnormal returns for the announcing firm. The one-day and 10-day windows are used as well.

Prevalence

Prevalence is measured as the per cent of companies in the sample that have undergone at least one layoff during the study time period. This measure gives an indication of the overall prevalence of layoffs. It also enables us to incorporate the dimension of time into the model.

Announcing firm size

Given that the event of interest directly relates to the employees of the company, we selected the number of employees as reported in 10-K filings as our measure of size rather than market capitalization or total revenues.

Rivalry

Consistent with the idea that managers consider a small group of companies as relevant (Porac et al., 1989), we first defined each company's rival group by the self-selected group of competitors listed in the company's 1996 Proxy Statement (Definitive 14A). The SEC requires companies to compare their financial performance to a broad market index and to a self-selected group of companies engaged in similar business activities (as indicated under 17CFR240.14a-3 pertaining to the Securities Exchange Act of 1934). We use self-selected rivals to identify those rivals most salient to managers (and shareholders). It is this group that we hypothesize would most likely serve as the reputational and value reference group.

While proxy statement rival citations have been found to contain some degree of bias in that managers tend to select firms whose performance makes their company's performance look more favorable (Porac et al., 1999), 55 per cent of the sample companies performed better than their comparison group, while 45 per cent performed worse, suggesting a lack of citation bias in the overall sample.

We then used the rival citations to create a company by company rival network matrix. The network of rival citations provides the opportunity to model the diminishing reputational influences that would take place as inter-firm comparability lessens. We used UCINET to calculate network distance, which we used as our measure of rivalry. A distance of 1 represents direct rivals, a distance of 2 or greater would indicate an indirect rival. As the network distance increases, the similarity of the rivals lessens. For example, Exxon is a rival of Chevron, Chevron is a rival of ARCO, who is not a rival of Exxon. ARCO is also a rival of Marathon Oil who is not a rival of Chevron or Exxon. In this illustration, Exxon-Chevron, Chevron-ARCO and ARCO-Marathon would all have network distances equal to 1. Exxon-ARCO and Chevron-Marathon would have network distances of 2. Exxon-Marathon would have network distance of 3.

The resulting network is rather sparse, as shown in Figure 2. Companies cited from 3 to 39 rivals, with an average of 10.29. As a result, the overall density of the network was 0.18, indicating that only 18 per cent of the total possible citations were present. This reflects that industry participants primarily consider a restricted subset of firms to be relevant competitors. These industry sub-groups tend to be based upon size, globalization of operations and involvement in various stages of the oil production value chain (exploration, production, refining and marketing).

Figure 2.

Rival citation network

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Overall network reciprocity was 74.3 per cent. This high level of reciprocity indicates consistency in managerial perceptions of industry segments The network data includes 24 companies that cite standard industry indices (such as the Dow Jones Secondary Oil Index) as a rival, even though they themselves were not one of the index companies and thus not likely to have their citation reciprocated. Taking out the links to this Index from these 24 companies, the level of reciprocity increases to 83.4 per cent.

Control Variables

Layoff size

Layoff size, measured as the per cent of total company employees that will be laid off as indicated in the layoff announcement, is also included as a control. The log of this measure is used in the analysis.

Prior market performance

We calculated total return to shareholders to control for the prior equity market performance of the non-announcing firm's stock. Total return is defined as stock price appreciation during the past financial quarter plus dividends divided by the stock price at the beginning of the quarter. The average of the past three financial quarters is used in the model.

Merger-related layoffs

Given that layoffs frequently accompany the integration efforts that follow a merger, spin-off or buy-out, we have included a control variable to account for this particular type of layoff announcement.

Announcement leakage

We have included a control variable to measure the days since the company provided an initial hint of a layoff. These were obtained from articles published within six months of the official layoff announcement. Examples of this kind of leakage included annual shareholder meetings where firms disclosed plans to cut overhead costs, or announcements of large reorganizations that mentioned an unspecified number of layoffs.

RESULTS

Our search of news sources uncovered 71 layoff events ranging from 1 to 40 per cent of employees in 30 companies (53 per cent of the sample) between 1989 and 1996. Although layoffs occurred in every year, the sample time period contained two 'waves' of layoffs, one in 1992, and one in 1994. The layoffs are displayed graphically in Figure 3.

Figure 3.

Number of layoff announcements per quarter

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The data set includes measures for each non-announcing firm at the time of each layoff announcement, for a total of 3,618 observations. Descriptive statistics and correlations for the data are found in Table 3.

Table 3 - Descriptive statistics and correlations.

Full table

Similar to the findings of most layoff event studies, the mean reaction for the announcing firm is slightly negative. However, the reactions in this study were not significant. The mean intra-industry reaction for non-announcing firms was positive for both event windows, but not significant. The mean intra-industry reaction for the 1-day window was 0.00008 (p<0.89) or for the 10-day window was 0.0015 (p<0.19).

The regression model results are presented in Table 4. The table displays the results for the two dependent variable event windows.

Table 4 - Regression results.

Full table

The overall model fit for the one-day window was significant with an F-statistic of 9.24 (p<0.001) with an adjusted R²=0.02. The 10-day window model was also significant (F=27.07, p<0.001), and the model had better explanatory power with an adjusted R² of 0.06. While explanatory power of these models is relatively low, these results are comparable with other intra-industry reaction studies.

An evaluation of prior intra-industry reaction research revealed that three methodological factors affect model fit: the type of announcement, the level of diversity of comparable firms in the sample and level of analysis of intra-industry reactions (individual firm versus portfolio of comparable firms). The prior study with the highest level of explanatory power (indicated by R²) uses a portfolio of the two or three firms mentioned in the new product announcements (Zantout and Chaganti, 1996). Their R² statistics were in the 0.30–0.35 range. However, two other studies with methodologies more comparable to our design had lower levels of fit. The first study design included company-level returns from the five companies in the same 4-digit SIC code with market value closest to the focal layoff announcement firm and their best fitting model had R² statistics as high as 0.04 (Sun and Tang, 1998). The other study design considered returns from all companies in the same 4-digit SIC code following stock-split announcements. This analysis resulted in R² statistics ranging from 0.007 to 0.057 (Tawatnuntachai and D'Mello, 2002). Given that our methodology includes firm-level reactions to layoff announcements and a broadly defined set of rival firms, the explanatory power of our models is in line with other comparable research in this area.

The one-day window results indicate that the strongest contribution comes from the significant positive reaction (=0.26, p<0.001) for the announcing company. This positive coefficient provides support for the contagion theory of intra-industry information flows, as predicted in Hypothesis 1b rather than the competitive theory proposed in Hypothesis 1a. If a layoff is viewed as positive information for the announcing company, it is also viewed as positive news for other firms in the industry. Negative reactions for the announcing firm are viewed as bad news for other industry firms. For the one-day window, we also find support for Hypothesis 2. Industry prevalence of layoffs was marginally significant (=-0.03, p<0.10). As hypothesized, greater industry prevalence of layoffs resulted in slightly larger negative reactions for non-announcing firms.

We do not find support for Hypothesis 3. Announcing firm size (=-0.01, p<0.73) did not significantly influence the one-day reactions for non-announcing firms. The effect of rivalry also did not show a significant direct effect (=0.00, p<0.85) on abnormal returns. As proposed in Hypothesis 4, the effect of industry transfers on rivals should have been lower for firms that do not directly compete with the announcing firm.

We do find a significant negative interaction (=-0.16, p<0.05) with the degree of rivalry and the announcing firm reactions for the one-day window. We interpret this result to indicate that when the announcing firm has a negative reaction, firms that are closer rivals experience less of a negative effect. The same dampening effect is true for a positive reaction for the announcing firm, that is, close rivals experience less of a positive effect. The negative interaction coefficient may reflect the combination of contagious and competitive effects. While distant rivals experience mainly the contagious effects of the announcements, the contagious effect is negated somewhat by the competitive effects for close rivals.

Two of the control variables, prior market performance (=-0.08, p<0.001) and merger related layoffs (=0.05, p<0.01) were also found to be significant for the one-day reactions. The standardized coefficient for prior market performance was negative, indicating that if the non-announcing firm's stock had been performing well, the news of a layoff by an industry rival was viewed more negatively. Merger-related layoffs were found to have a significant positive effect on the one-day reactions for non-announcing firms. The coefficients were not significant for the control variables for layoff size (=0.02, p<0.29) or leakage (=-0.02, p<0.31).

The pattern of findings for the ten-day reactions were somewhat different than those of the one-day window. As with the one-day window, the largest contribution came from the ten-day reaction to the announcing firm which was positive (=0.26, p<0.001), again supporting the contagion model proposed in Hypothesis 1b. The ten-day window model also had significant negative results for the prevalence of layoffs (=-0.10, p<0.001), thus supporting Hypothesis 2. As more companies implemented layoffs (and over the passing of time), the layoff news had a negative impact on the value of other firms. The ten-day window results supported Hypothesis 3. When larger firms make layoff announcements, it is more likely to have a significant positive impact (=0.07, p<0.001) on other firms in the industry. One way to interpret the positive direction of this coefficient relates to unique nature of very large firm announcements. Perhaps because larger firms have more organizational slack (Love and Nohria, 2005), their layoff announcements are interpreted more as efficiency-focused actions that are viewed positively, as indicated by the positive correlation between layoff company size and announcing firm reaction. This positive signal of industry restructuring may carry through the rest of the industry. The ten-day model did not demonstrate either direct (=-0.01, p<0.61) or indirect effects (=-0.07, p<0.38) of the degree of rivalry projected in Hypothesis 4.

For the ten-day model, several of the control variables were also significant. As in the one-day model, the coefficient for market performance was negative and significant (=-0.08, p<0.001). Additionally, both layoff size (=0.04, p<0.04) and leakage (=-0.05, p<0.01) were significant in the ten-day model. Larger layoffs tended to result in more positive intra-industry reactions, indicating some evidence of competitive effects. The overall results tend to point towards contagion effects, as indicated by the positive coefficient for the announcing firm reaction. However, in the instance of very large layoffs, competitive effects may dominate because the largest layoffs (30 or 40 per cent of employees) may be viewed as idiosyncratic to the company. Shareholders of other companies would not view this as being relevant to the value of the company they own. Announcement leakage had a significant negative influence on the ten-day reactions. Earlier layoff hints from the announcing firm resulted in worse announcement reactions for non-announcing firms. The coefficient for the merger-related control variable was not significant (=0.02, p<0.29).

The idea of intra-industry reactions is not inconsistent with theoretical underpinnings of the market's use of information in pricing, nor is it in violation of any of the assumptions of event study methodology (Schipper, 1990). However, the differences we find between the one-day and ten-day intra-industry reactions may reflect different dynamics about market efficiency that have not yet been explored. The differences we observe here may reflect that the process of incorporating new information into the value of other firms may function differently under different levels of efficiency.

DISCUSSION AND CONCLUSION

In this paper, we show that a firm's reputation with its shareholders, as reflected in the market value of the firm, depends in part upon the actions of other firms in the industry and shareholders' interpretations of those actions. If a firm's layoff announcement is seen as a negative signal about future prospects in the industry, then the reaction by the shareholders of other firms will be negative as well. Furthermore, as layoffs become more prevalent in the industry over time, the impact of subsequent announcements on non-announcing firms becomes more negative. Close rivals tend to be insulated somewhat from the immediate reaction to the announcement, as the competitive advantages (disadvantages) offset the contagious bad news (good news). For example, if the announcing firm experienced a negative reaction, direct rivals also experienced a negative contagious reaction. However, the magnitude of the negative reaction was reduced, possibly by countervailing competitive effects. Other industry participants further removed from the announcing firm did not benefit from the countervailing competitive effects and experienced more negative intra-industry reactions than direct rivals.

Three methodological issues should be considered when interpreting the findings of this research. The first is that this study examines one industry, thus limiting the generalizability of the results. However, single industry samples have been used in other layoff studies to highlight mechanisms not evident in Fortune 500 samples, such as company size (Alli et al., 1994), strategy (DeWitt, 1998) or intra-industry effects (Madura et al., 1995). We proposed in this study that the commonality of business models, market conditions and environmental threats among industry rivals serves as the foundation for industry norms and paradigms used to generate perceptions of value. While a multi-industry sample would demonstrate our industry influence assumption by providing a variety of industry characteristics (risk, cyclicality, technologies) to test. Such a sample would also enable us to test other definitions of organizational fields that would influence firm reputation among shareholders. However, our single industry focus does enable us to identify and isolate the mechanisms influencing intra-organizational reputational effects.

The second methodological challenge is inherent in event studies of layoff announcements. The continual market updating process makes the 'unanticipated events' assumption of the event study methodology somewhat problematic. Some companies gradually leaked their intention to layoff months in advance of the formal announcement date, thus reducing the likelihood of our model capturing an abnormal return within a narrow event window. We have attempted to accommodate for this tendency by including a slightly longer event window for intra-industry reactions and by explicitly controlling for leakage.

While longer event windows can enable us to capture the reactions with the leakage, it also increases the likelihood of competing events occurring during the event window, thus raising the third methodological challenge. While the final sample of layoff announcements does exclude instances with competing events for the announcing firm, we did not control for competing events for the non-announcing firms. While this assumption is critical to be able to draw inferences about the effect of the announcement on the announcing firm, we question the practicality of gaining that level of methodological control for the non-announcing firm. As our overall results indicate, events outside the firm can impact its stock price, and it would be impossible to control for all external events. In addition, we might bias the sample. Firms are more likely to announce a layoff in close time proximity to their rivals (Goins, 2000) and these intentionally close announcements would be excluded as competing events. To exclude instances with a prompt rival response would not fully reflect the interdependencies inherent in firm value within an organizational field and the way these influence managerial actions.

Methodological concerns notwithstanding, this research contributes theoretically to our understanding of dynamics within organizational fields. The process of competing for external stakeholder resources while simultaneously trying to maintain one's reputation creates a duality to organizational field membership. Industry rivals not only compete with each other in factor and product markets, but they share a joint interdependency with the information they convey to the financial markets through the totality of independent firm actions. Empirically, we find that information from the actions of one firm sends signals that shareholders incorporate into their valuations of other companies. As a result, the influence of a layoff on a firm's reputation amongst shareholders is not limited to the announcing firm, but filters through to affect other rivals as well.

Theoretically, our work responds to the call to further explore the influence of organizational field legitimacy on firm-level reputation (Deephouse and Carter, 2005). By broadening the lens to the field level, we are able to demonstrate a few of the different environmental contingencies to consider in inter-organizational reputational dynamics. As we demonstrate, the theoretical foundation in the area of reputation adequately incorporates this environmental context; however, it may not be as well understood or studied as firm-level reputational dynamics. Therefore, the field-level perspective raises the importance of modeling some level of environmental contingencies into empirical reputation studies. Our findings also provide empirical evidence that reputation can be conceptualized as a strategic resource, despite the fact that it is intangible and is externally bestowed. In a manner similar to dynamic capabilities (Teece et al., 1997), reputation appears to buffer an organization from the influences of organizational field changes in legitimacy.

By examining a phenomenon through both the institutional and resource-based lenses, our work also begins to reconcile how the two competing forces of cooperation and competition can work together to influence firm-level outcomes. Assuming that both competitive and contagious forces are present in any information transfer, as we suggested in our hypotheses, the relative strength of these two forces can vary over time. Barnett (2006) theorizes about the shifts in organizational fields from periods of competition to periods of collective action. Measuring the relative strength of competitive and contagious intra-industry information flows over a period of time could provide an empirical way to identify the inflection points in this process over time. In addition, different salient dimensions of inter-group rivalry could be identified by examining the periods of significant competitive effects and periods of significant contagious effects.

Our findings carry mixed messages to managers of publicly traded firms. As with much of the research using an institutional theoretical base, the key managerial implication is that some level of managerial discretion is removed from many strategic actions. Our results suggest that to some extent, shareholder perceptions of firm reputation are not completely under managerial control. However, our findings also suggest that to the extent that industry rivals have a shared reputational destiny, managers would be wise to become aware of the actions of their rivals. In the instance of a negatively perceived action such as a layoff, managers have some options. In the event that the initial layoff announcement is attributed to idiosyncratic firm causes, non-announcing firms can try to differentiate their firm from the announcing firm to demonstrate why their reputation should not be negatively affected as well. In the event the initial layoff announcement indicates industry wide weakness, it behooves managers to act quickly and to encourage others to engage in a collective effort to be fast followers. A longer and more drawn out response by laggards within the industry has a detrimental effect on the firm value of competitors as well as the reputation of the industry as a whole.

In conclusion, by extending the theoretical reputation framework to consider reputation as reflected in firm value, we provide a way to empirically study firm reputation from the perspective of shareholders. We find that reputation effects of layoff announcements spillover beyond the announcing firm and extend to other firms as a result of their interdependence. Our new perspective on the duality of organizational field membership can provide researchers and managers with a different framework within which to balance the somewhat divergent demands of competition and cooperation and their influence on firm reputation.

Notes

¹ More recent events, such as OPEC production cuts, the 9/11/2001 attacks and the Iraq war have caused oil prices to rise to levels experienced in the early 1980s, further underscoring the uniqueness of the sample time-frame for this industry.

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Acknowledgements

A preliminary version of this paper was presented at the Academy of Management Meeting in Atlanta, GA. This paper stems data originally collected for Sheila Goins' dissertation. She acknowledges the assistance of Thomas D'Aunno, Mark Zbaracki, Jesper Sorensen, Ron Burt and Damon Phillips for guidance with the initial data collection and project design. We also thank three anonymous reviews for their constructive suggestions and challenging questions.