INTRODUCTION

An organization's reputation according to the resource-based view of the firm can be valuable (Hall, 1992), rare, hard to duplicate (Mahoney and Pandian, 1992) and non-substitutable. Research has shown that as an important source of competitive advantage (Barney, 1991), reputation can provide information about expected future behavior of an organization (Weigelt and Camerer, 1988). Organizations can use their reputations to deter entry (Milgrom and Roberts, 1982), charge a premium price (Shapiro, 1983) or enhance access to capital market (Beatty and Ritter, 1986). However, the past reputation may no longer be a reliable predictor of an organization's future behavior when a disruptive event sharply ends what has institutionalized in stakeholders' mind with respect to their previous thinking of the organization. In this paper, we explore the relationship between an organization under a damaging crisis and the potential implications of that upon other industry members. We propose that an organization's damaged reputation may have implications that go beyond its boundaries and affect others.

Various definitions of corporate reputation have been proposed primarily emanating from two streams of literature. An economics perspective argues that particular attributes of an organization signal stakeholders as to the worthiness of that particular entity (Milgrom and Roberts, 1982; Weigelt and Camerer, 1988; Clark and Montgomery, 1998). This leads stakeholders to assign various economic choices to the organization (Dollinger et al., 1997) which may result in differences in organizational performance. An institutional perspective characterizes reputation as a global impression representing how multiple stakeholders view the organization as a collective (Hall, 1992; Fombrun, 1996; Rindova et al., 2005). The 'true' nature of an organization is identified through the sharing of information among a diverse population of intermediaries, which allow stakeholders to make assessments and judgments regarding their current and future interaction with a particular organization (Pollock and Rindova, 2003). Our work tends to lend itself to the collective nature of reputation however we recognize the economic implications. We, as others before us, therefore define corporate reputation as 'observers' collective judgments of a corporation based on assessments of the financial, social, and environmental impacts attributed to the corporation over time' (Barnett et al., 2006: 34).

A shift may occur in an organization's reputation as a result of a crisis. Such crises usually happen when there are widely publicized and damaging events that lead stakeholders to re-evaluate their previous conceptions of an organization's capabilities. Zyglidopoulos and Phillips (1999: 335) define reputational crisis as 'a situation in which important stakeholders negatively re-evaluate their opinions and beliefs about the firm.' Their work as others in the crisis and reputation literature typically details the impact of a crisis upon an organization, its management and consequences. However, we know of no work that examines how changes in a focal organization under a reputational crisis influence others operating in the same industry.

To fill in this gap, we draw upon social network theory and stakeholder research to argue that a reputational crisis creates an environment of high uncertainty and ambiguity. Since many stakeholders do not possess sufficient information to comprehensively evaluate the causes of a reputational crisis, or properly disentangle its impact on other organizations, we expect they will stereotype organizations based on their proximity and structural equivalence to the focal organization under the crisis. In this regard, the reputational crisis that impacts a focal organization may spread to others. We call this phenomena reputation spillover¹ (ie when the damage to one organization's reputation spills over to another). The effects of proximity and structural equivalence on the likelihood of reputation spillover are contingent upon a number of factors. We expect that the spillover effect is stronger when the reputational crisis originates from an organization with high network centrality, operating in an industry with a centralized network structure and the potential recipient organization possesses an unfavorable reputation.

A reputational crisis can be triggered by events such as accidents (Buchholz et al., 1985; Marcus and Goodman, 1991; Perrow, 1984), scandals (Marcus and Goodman, 1991; Sethi, 1977) or financial problems (Kent, 1993). Previous work defines triggering events of a reputational crisis as 'organizationally-based episodes, which cause reputational damage and unfold through complex technological, organizational and social processes' (Shrivastava et al., 1988: 285). A triggering event is the starting point of a reputational crisis and its nature can arguably influence how the crisis unfolds, in general, and how stakeholders interpret and react, in particular. Stakeholders here are defined as 'any group or individual who can affect, or are affected by, the achievement of an organization's purpose' (Freeman, 1984: 25), including potential investors, customers, employees and suppliers.

The triggering events of reputational crises are usually infrequently observed events with no ex ante expectations regarding when they might occur (Pearson and Clair, 1998). They can force the organization to diverge from established practices and strategies (Meyer, 1982; Miles, 1982), make its future more uncertain (Shrivastava et al., 1988) and even threaten its survival (Dutton and Jackson, 1987). The reputational crises of our interest typically involve highly complex events (Dutton, 1986). We define the complexity of a triggering event as the degree of uncertainty or ambiguity the event can create for stakeholders when they evaluate the antecedents and consequences of a reputational crisis. A plausible assessment of the impact of a complex event on an organization's reputation is difficult, because it could be the result of a number of failures interacting in non-linear and unpredictable ways (Perrow, 1984). It is important to note that a reputational crisis does not have to be complex to spread to other industry participants. For example, if a manufacturing firm experiences a major accident or product failure resulting from a certain production technology; other industry participants using the same or similar technologies are likely affected as well. Indeed this is what Bowen et al. (1983) observed while investigating the Three Mile Island incident. The spillover of this type of reputational crisis (entailing no uncertainties) is not of interest here. Instead, we are more intrigued by the reputational crisis in which the consequences of the crisis on others are less well understood.

For conceptual clarity we limit our analysis to reputation spillover between organizations operating in the same industry – thus basically limiting our analysis to within-industry effects. However, we do recognize that the spillover effects of a reputational crisis may jump industry boundaries and affect organizations in other industries as well. For instance, it may affect organizations operating in the same value chain as the focal organization. Consider the Firestone debacle of 2001 where a series of tire failures on Ford Explorers caused a number of injuries and fatalities (O'Rourke, 2001). Not only was the reputation of Bridgestone Firestone Corporation damaged but also (for a time) the Ford Motor Corporation. In addition, a reputational crisis may affect organizations with the same organizational form as the focal organization (Yu et al., in press). An example is the crisis that revolved around the collapse of Enron. This seemingly isolated business failure subsequently extended well beyond energy trading to affect (to varying degrees) virtually all publicly traded companies (Hamilton and Francis, 2003). Similarly, the Union Carbide accident at Bhopal affected multinationals well beyond the chemical industry and the Indian market (Bowman and Kunreuther, 1988).

As indicated in our definition of reputation spillover, this paper focuses on the negative spillover effects that stem from a reputational crisis. In fact, as suggested by prior research a reputational crisis might have positive effects on other organizations. For instance, other organizations may take advantage of the focal organization's misfortune and attempt to capture a portion of its market share (Porter, 1980). Alternatively, a positive change in one organization's reputation might cast a halo on other organizations. Although positive spillover effect warrants separate consideration in future research, it is outside the scope of this study.

Our paper is organized as follows. First, we briefly review the research on social network and stakeholder. Then we explain when, how and why a reputational crisis that occurs to one focal organization might spread and affect other industry participants. Next, we explore the contingencies that are likely to shape this spillover process. Finally, we discuss the implications of our paper.

THEORETICAL BACKGROUND

Interest in reputation research has grown in the past decade. Various studies have suggested that reputation is an important source of competitive advantage (Barney, 1991). Most of the existing research views reputation as a firm-level construct. In fact, this is just one way of defining it. King et al. (2002) suggested that reputation could be a common resource shared by many organizations in the same industry. Tirole (1996: 2) went further by proposing that 'the past behavior of a member's group conditions that group's current behavior and can therefore be used to predict group members' behavior.' While a reputational crisis may occur initially at an 'individual' level, it is likely that stakeholders will evaluate its impact at the 'group' level.

Consider the following event as an example. In October 2002, the US Food and Drug Administration (FDA) rejected two hormone replacement therapy drugs from Schering A.G. due to concerns over side effects. Subsequently, Schering A.G. lost more than a quarter of its market value. In addition, the rejection of Schering's new drugs drew attention to, and raised further questions about, the safety of a wide range of hormone replacement drugs. According to NDCHealth, a healthcare information services company, orders for drugs in the same category decreased between 13 and 16 per cent for Pfizer, Solvay and Galen (Fuhrmans, 2002), even though they all claimed that their drugs did not have the same side effect as Schering A.G. As this example reveals, Pfizer, Solvay and Galen were all negatively affected by the reputational crisis that occurred to Schering A.G., mainly because stakeholders perceived them all as similar and therefore sanctioned them without exceptions (Tirole, 1996).

In fact, reputation spillovers have been studied previously at both the country level (Cole and Kehoe, 1996) and the organization level (Yu et al., 2002; Mayer, 2006). Compared with the earlier work, our study undertakes a different theoretical angle. More specifically, we draw insights from social network and stakeholder theories to explain the phenomenon of reputation spillover.

Applying Stakeholder Theory and Social Network Theory

In our conceptualization, the key to a reputation spillover event is the interpretation and reaction of stakeholders. Following Freeman (1984: 25), we view stakeholders as 'any group or individual who can affect, or are affected by, the achievement of an organization's purpose.' The development of stakeholder theory has largely centered around two related streams: (1) defining the stakeholder concept and (2) classifying stakeholders into categories and understanding their influences (Freeman, 1984; Carroll, 1989; Brenner and Cochran, 1991; Hill and Jones, 1992; Rowley, 1997; Frooman, 1999; Post et al., 2002).

Regardless of how scholars define stakeholders, there is a core idea underlying the stakeholder theory. That is, organizations need to address a set of stakeholder expectations; thus, in many aspects management choice is a function of stakeholder influences (Brenner and Cochran, 1991). In fact, this notion has been substantiated by a number of studies (Zuckerman, 1999, 2000; Podolny, 1993, 2001; Stuart et al., 1999; Benjamin and Podolny, 1999). Researchers have shown that the perceptions or expectations of stakeholders are important in disciplining organizations to perform expected roles in the network. There seems little doubt that stakeholders are instrumental to firm performance and survival, as their choices affect both the cost structure and the pricing ability of the organization. When a reputational crisis occurs, although the impact of one stakeholder might be small on its own, the aggregated influences from the entire stakeholder set are likely to be considerably significant (Rowley, 1997).

A reputational crisis creates uncertainty for stakeholders to ascertain its causes and consequences. Since a complete assessment of a reputational crisis's influence on other organizations may entail comparing all the attributes of the focal organization with all known attributes of other organizations, such an assessment is quite unlikely given the imperfect information flow and the high costs of acquiring such information. To manage this uncertainty, we propose that stakeholders may evaluate the impact of a reputational crisis on a set of organizations based upon their perceived relatedness to the damaged organization.

This then begs the question of what vehicles stakeholders utilize to evaluate the relatedness between organizations. Social network research suggests two approaches to analyze organizations' structural similarities and patterns of relations (Brass et al., 1998; Burt, 1987). Focusing on the direct ties between actors (eg strategic alliances between organizations), the first approach argues that similarity is a function of proximity. Research has found that the more frequent the communication between two organizations, the more likely that they will share similar evaluation of strategic issues (Galaskiewicz and Burt, 1991). Thus, directly linked organizations will be more likely to resemble one another than indirectly linked ones. Interaction breeds similarity and that similarity breeds interaction (Blau, 1977).

Focusing on the positions of actors in a social network, the structural equivalence approach suggests that organizations compare themselves with, and adopt similar attitudes and behaviors of, those others who occupy equivalent positions in the network (Brass et al., 1998). Position here refers to a collection of actors who are similar in social activity, ties or interactions, with respect to actors in other positions. Since position is based on the similarity of ties among subsets of actors, rather than their adjacency (proximity, or reachability), actors occupying the equivalent position need not be in direct contact with one another (Wasserman and Faust, 1994). For example, car dealers in different cities occupy the position of 'car dealer' by virtue of similar kinds of relationships with automakers and customers, though individual car dealers may not have any contact with each other, work with the same automakers, or serve the same customers.

As two most important network properties, proximity and structural equivalence are influential drivers of social contagion process. In our study, we use them as the foundation of our theoretical framework to explain the phenomenon of reputation spillover in the context of a reputational crisis.

A FRAMEWORK TOWARDS REPUTATION SPILLOVER

As we noted earlier, when a reputational crisis occurs, it can sharply end what has become institutionalized in stakeholders' minds. Consequently, stakeholders use various societal, organizational and personal mechanisms to reinterpret the changing environment. Since determining the impact of a reputational crisis requires accurate information, in situations of ambiguity stakeholders might find it difficult to differentiate between individual organizations, thereby penalizing all organizations that are either proximate or equivalent to the focal organization equally. Under such condition, although the crisis only occurs to one organization, its negative impacts may spread to others as well.

Reputation Spillover due to Proximity

The underlying logic of spillover by proximity is that communication is easier when organizations are directly linked and it gets more difficult as they have many intermediaries between them. Interorganizational ties serve as 'pipes' through which, information, resources, product and financial transactions are transferred between organizations (Podolny, 2001). Direct contacts or alliances with other industry members also offer the potential for organizations to create entry barriers and improve performance through better information exchange and mitigated competition (Dollinger et al., 1997; Ingram and Roberts, 2000). Thus, to a certain degree, direct contacts breed strategic interdependency between organizations.

Furthermore, direct contacts shorten the social distance² between organizations. When the communication between two organizations is frequent, they are likely to adopt the orientations and values of each other (Galaskiewicz and Burt, 1991), and this effect will be further enhanced or enforced by institutionalizing process within and between them (DiMaggio and Powell, 1983). Hence direct contacts between two organizations make them proximate (Coleman et al., 1966). The closer the relational contact, the more likely that the change in one organization's disposition will affect the other (Galaskiewicz and Burt, 1991; Borgatti and Everett, 1992; Wasserman and Faust, 1994).

In sum, direct contacts drive organizations to closely resemble one another, which in turn evokes a similar schema for stakeholders to interpret their true characteristics after a reputational crisis occurs. Therefore a reputational crisis is more likely to spread to an industry participant which has direct contacts with the focal organization.

Proposition 1:

The likelihood of reputational spillover from an organization under reputational crisis to an industry participant is positively related to their proximity to one another.

Although no studies in the literature have explicitly examined the spillover of a reputational crisis, there is some indirect support to our proposition. For instance, Ferguson et al. (2000) found that by establishing strategic alliances, reputational information may spread through the interorganizational ties and over time coalesce into a reputation for both partners as a whole. Simonin and Ruth (1998) empirically showed that alliances allow consumers' prior attitudes towards one organization to spillover to the alliance partner. Finally, Uzzi (1997) demonstrated that exogenous shocks may cause embeddedness to shift from an asset to a liability. As a result, social processes that increase network proximity combine with resource dependency issues to increase the vulnerability of tightly connected organizations.

Reputation Spillover due to Structural Equivalence

The underlying logic of spillover by structural equivalence is that stakeholders categorize firms based on perceived similarity in their core attributes (Holland et al., 1986; Rosch, 1978; Smith and Medin, 1981), even though there are few, if any, direct contacts connecting them together. Research has shown that organizations displaying similar core attributes (such as organizational mission, form of authority, core technology and general marketing strategy) are more likely to be treated as belonging to the same category (Hannan and Freeman, 1984; Polos et al., 2002).

There are multiple core attributes that differentiate firms from one another. Scholars such as Burt (1987) and White and Reitz (1983) use network position to derive social homogeneity. They partition a network into mutually exclusive classes of equivalent actors who have similar relational patterns (Wasserman and Faust, 1994). Burt (1980) defined two actors as structurally equivalent when they have the same pattern of ties to and from other actors. Structurally equivalent organizations are likely to be perceived similar by stakeholders for a number of reasons. For example, they may have a similar organizational structure and therefore undertake similar actions and responses when facing changes in the environment (Borgatti and Everett, 1992). Furthermore using each other as a frame of reference for subjective judgments, they may express similar opinions even if they have no direct communication (Burt, 1987). As a result, Podolny (2001: 33) noted that the equivalent positions of two market actors provide an important informational cue on which outsiders rely to make inferences about their underlying quality. He termed this 'networks as the prisms of the market.'

In sum, we expect that when stakeholders do not possess sufficient information to disentangle the causes and consequences of a reputational crisis, they may penalize organizations sharing the equivalent structural position as the focal organization. Note that in contrast to spillover by proximity, the spillover of a reputational crisis by structural equivalence requires no direct connectedness between organizations.

Proposition 2:

The likelihood of reputational spillover from an organization under reputational crisis to an industry participant is positively related to their structural equivalence.

Previous research on product differentiation provides indirect support for our proposition (Gaspar and Massa, 2004). A key feature of product differentiation is that it makes firms' products less demand elastic and hence protects them from demand fluctuation. In other words, firm specialization makes the focal firm less similar to other firms and thus makes the information concerning other firms less relevant to make inferences about the focal firm. Dissimilarity in market segments may increase a focal organization's idiosyncratic volatility, but it reduces its chance of being affected by industry-wide demand shocks (Gaspar and Massa, 2004).

Here, we would like to note that we do not claim that the processes that create cognitive categories in the minds of stakeholders are mutually exclusive. Indeed, categorization is a complex process involving multiple criteria (structural position, strategic similarity, human-resource composition, etc). We focus on proximity and structural equivalent position because these two network properties are influential drivers of social contagion (Burt, 1987; Galaskiewicz and Burt, 1991; Wasserman and Faust, 1994). Moreover, we do not claim that the two mechanisms of spillover take place in isolation from one another. In certain cases, when firms are connected by direct ties (proximity), they may also possess similar network positions (equivalence). These nonlinearities do not invalidate our claims. However, as a first step towards understanding reputation spillover, this study takes a focused approach and leaves such nonlinear complexities for future research.

Contingencies Surrounding the Spillover Process

Two mechanisms of spillover described above suggest how a reputational crisis spreads from the focal organization to an industry participant(s). However, the likelihood of reputation spillover is not uniformly symmetric. Below, we further suggest that the influence of proximity and structural equivalence on the likelihood of reputation spillover is contingent upon a number of factors. More specially, as indicated in Figure 1, we argue that the effects of proximity and structural equivalent on the likelihood of reputation spillover will be stronger when the reputational crisis originates from an organization with high network centrality, operating in an industry with a centralized network structure and the potential recipient organization possesses an unfavorable reputation.

Figure 1.

A framework of reputation spillover

Full figure and legend (44K)

Network centrality of the focal organization

Network centrality refers to an individual organization's position in the network relative to others. As one of the most important properties of network structure, network centrality evaluates an actor's prominence (Galaskiewicz and Wasserman, 1994), power (Brass and Burkhardt, 1993) and status (Podolny, 2001). In other words, actors who are the most important or the most prominent are usually located in the most central positions within a network. Central organizations are associated with more stakeholders and receive more public scrutiny than those periphery organizations (Fombrun and Shanley, 1990; Pfeffer, 1982). The extensive contacts of central organizations in the network, coupled with their power and social status, increase the availability of information and inflate the public's familiarity with them (Tversky and Kahneman, 1974).

Furthermore, in most cases, central organizations are also the organizations that, through their social influence, power and control, affect and regulate the decisions and activities of other organizations operating in the same network. They are more representative of the acknowledged image of the entire network and they can easily intensify the interests and increase the attentions on any particular occurrences including a reputational crisis (Hoffman and Ocasio, 2001). Thus, when a central organization undergoes a reputational crisis, information about this disruptive event is likely to spread quickly in the public domain, which will greatly facilitate and accelerate the reputational crisis spreading to others (Fiske and Taylor, 1984). Hence we propose that:

Proposition 3:

The effects of proximity and structural equivalence on the likelihood of reputation spillover are stronger when the reputational crisis occurs to a central organization in the network.

Consider the following event as an example. In the mid-1980s, the FDA released the results of a study that showed an unusually strong link between a tampon manufactured by Procter & Gamble and toxic shock syndrome (TSS) – a rare, life-threatening bacterial infection (Behr, 1980). The cause of TSS seemed to stem from a unique and innovative material used by Procter & Gamble (but by none of its rivals). In response, Procter & Gamble began a recall of their product from store shelves. Interestingly however, Tampax, the next largest rival in the product category, also began to experience declining market valuation, even while their product was recording record revenues (Metz, 1980). Arguably, had the crisis struck not Procter & Gamble but a much smaller organization, rivals would probably not have faced the same generalized and negative reactions.

Network structure of the industry

If we view the industry as a network of strategically interdependent organizations, then the information cues used by stakeholders to derive similarity between organizations are, at least in part, a function of network structure. Network structure refers to the density of ties among organizations and the aggregate structure created by these ties (Wasserman and Faust, 1994). Previous research suggested that understanding the structure of a network is important to mapping the spread of practices and their prevalence (Davis and Greve, 1997). Different network structures can be identified by the pattern of connections among members. Based on these patterns one can identify three archetypical network structures.

The first archetypical structure can be found in a centralized network,³ in which most or all peripheral organizations are connected to a central organization (Figure 2(a)). This scenario roughly resembles a monopoly industry, such as the diamond industry and the computer operating system industry, which are largely dominated by single organizations (eg DeBeers and Microsoft, respectively). The second structure can be found in a scale-free network, which is characterized by a few disproportionately important (ie connected) members (or hubs) (Figure 2(b)). A scale-free network, like a centralized network, has many peripheral actors. But it also includes certain organizations with disproportionately large numbers of links to other organizations. Biotechnology, broadcast media and refining industries are typical examples of this type of network. Finally, in distributed networks, all organizations are connected to few others and there are no disproportionately important organizations (hubs) in the network (Figure 2(c)). Most members in a distributed network have approximately the same number of links to others. Characterized by high differentiation and lack of significant scale economies, industries such as restaurants, health clubs and beauty salons are examples of distributed networks.

Figure 2.

Three archetypical network structures: (a) centralized networks, (b) scale-free networks and (c) distributed networks

Full figure and legend (60K)

These three archetypical network structures differ in density of ties among member organizations. As displayed in Figure 1, one highly connected organization (central organization) is very prominent in centralized networks while the importance of highly connected organization(s) becomes less influential in scale-free networks and even less so in distributed networks. Notably, the existence of highly connected organizations sharply reduces the distance between, and thereby increases the proximity of, any two organizations in a network.

Now assume that a reputational crisis randomly occurs to an organization in an industry network. We expect that the ease and magnitude of its spillover depends upon the network structure. In particular, we expect that the reputational crisis will spread most readily and with the largest magnitude in centralized networks followed in decreasing order by scale-free and distributed networks, due to the differences in average proximity of any two organizations in these network structures. Indeed, our analysis reflects the thoughts of Paul Baran approximately four decades ago that a distributed communication system is the least likely to be affected by, and hence most likely to survive a nuclear attack (cf. Barabasi, 2002). Therefore we propose:

Proposition 4:

The effects of proximity and structural equivalence on the likelihood of reputation spillover are the strongest when the reputational crisis occurs in an industry with a centralized network structure followed in decreasing order by a scale-free and a distributed network.

Past reputation of other industry participants

Reputation of an organization is the overall estimation in which the organization is held by its various constituents (Fombrun, 1996) and in essence reflects what stakeholders think and feel about the organization. Reputation is said to be favorable or positive when the organization is highly esteemed, worthy or meritorious, which implies a good name and high regard (Dollinger et al., 1997; Mahon and Wartick, 2003). There are at least two reasons to expect that the spread of a reputational crisis's negative impacts will be blunted among organizations with favorable reputations, or accentuated among those with unfavorable reputations.

First, reputation tends to be sticky. While it is true that following a disruptive event past reputation might no longer be as reliable as it was before, it is not easily substitutable and still carries valuable information about the organization (Williams et al., 2005). Reger and Palmer (1996) found that when the environment changes disruptively, people tend to rely on historical categories and old cognitive schemas to navigate the new situation. Second, as an asset, reputation can be used in a defensive manner, allowing an organization to preserve its market position when challenged (Clark and Montgomery, 1998). This is known as 'the reservoir of goodwill hypothesis,' according to which organizations with favorable reputations will receive the benefit of doubt from stakeholders when faced with sudden economic or political shocks (Jones et al., 2000; Bostdorff and Vibbert, 1994). Finally, in the process of acquiring positive reputation, it is likely that certain values become somewhat institutionalized within an organization. Consequently, stakeholders may defend the organization when it is threatened because of its historical contribution, role in the social fabric of the community and value as a symbol (Selznik, 1957).

Taken together, subsequent to a reputational crisis, 'information that is perceived to be consistent with existing definitions will not be revisited, because it is perceived as credible. Organizations with negative reputations will incorporate negative attributes more readily and those with positive reputations are more apt to resist assimilation of the stigma' (Fiol and Kovoor-Misra, 1997: 150). Therefore, the influence of a reputational crisis on an industry participant may be evaluated quite differently by stakeholders depending upon the organization's reputation.

Proposition 5:

The effects of proximity and structural equivalence on the likelihood of reputation spillover are weaker when the potential recipient organization has a positive reputation.

DISCUSSION

In this paper we propose a new theoretical construct – reputation spillover – to examine the process by which a reputational crisis may spread to others operating in its industry. Overall our study makes the following contributions. First, it increases our understanding of reputational crises – a phenomenon that has been significantly understudied in the literature. Second, we explicitly examine the importance of stakeholders in disciplining market patterns. The central argument of our study is that other organizations may be affected by a focal organization's reputational crisis, not necessarily because they have the same 'bad genes' as the focal organization, but because they were perceived structurally equivalent or proximate to the focal organization by stakeholders.

Our study offers several directions for future research. First, an organization's reputation may be multidimensional (Fombrun and Shanley, 1990). Consequently, the triggering event of a reputational crisis may have different impacts on different dimensions of an organization's reputation. For example, differentiating between several components of reputation (product quality, management integrity, and financial soundness) Dollinger et al. (1997) empirically demonstrated that when one component of organizational reputation was tarnished, others were not equally affected. This addresses an intriguing research question, how will rival organizations decide whether a reputational crisis can spill over to them when the reputational crisis influences multiple aspects of a focal organization's reputation? Interestingly as well, will they react?

Second, empirical research on reputation spillovers can be pursued both quantitatively and qualitatively. One avenue to trace the occurrence of reputation spillovers is to use stock market data, which is assumed to reflect investors' expectation of future cash flows. More specifically, using financial event history analysis, an analyst can examine how the drop of one organization's stock due to a reputational crisis affects the stock prices of other organizations. Researchers can also use well-established measures in the social network analysis such as network distance (the measure of proximity), structural equivalence and network centrality to empirically test our major propositions. (Please see Wasserman and Faust, 1994 or UCINET manual for a detailed description of these measures.) Alternatively, an in-depth qualitative analysis of an observed reputational crisis can also be efficiently used to study reputation spillovers. Timely and thorough qualitative data may allow the researcher to describe the sequence, frame the story, depict certain patterns of behavior and descriptively bring context into account.

Third, we believe it would be interesting to sort out the distribution of stakeholders' valuations and to consider how this distribution affects the likelihood of reputation spillover. In this paper, we assumed that a dominant opinion about the reputational crisis would emerge among stakeholders. In certain contexts (eg institutional consolidation), we believe this assumption is reasonable. However, heterogeneity among stakeholders is prominent in many settings. For instance, it has been shown that while most financial market participants are exposed to the same information sources, how they make decisions based on this shared information depends on their own prior experience (Shiller, 1995). Further, different stakeholders may have different degrees of separation from industry interests as well (ie some stakeholders are truly impartial, while others may be biased for self-interested reasons by industry concerns), which might affect how they play out their roles. Thus, for future research, it is important to analyze to what extent perceptions of stakeholders vary, and how a diversity of stakeholder perceptions affects the likelihood of reputation spillover.

Practical Implications

Our research is directed at providing some practical foundations from which managers can make decisions when facing reputational crises from one of it rivals. Our hope is to assist mangers, both reactively and proactively.

Reactively, we add to the crisis management literature by highlighting the likelihood that any organization is at risk for a negative impact aimed at its reputation due to the actions of others in its competitive environment. According to traditional economics research, when a rival was hurt by a reputational crisis, organizations should always capitalize on its misfortune and engage in aggressive competitive strategies to improve their market share. However, this reasoning might not hold true when the potential for reputation spillover exists. If the likelihood for reputation spillover is high, actions of any organizations are bounded not only by market-level (ie market size, dominant designs and regulations) and firm-level (ie production resources, capacity and managerial know-how) constraints, but also by the constraints imposed through the interpretations and reactions of stakeholders as to their perceived relatedness to the focal organization. Managers should be adept at understanding this risk of being 'tarred by the same brush' and through this awareness be prepared to defend its own reputation. It is unlikely that managers can predict with any certainty the spillover potential of a rival's crisis for themselves. However, having some basic guidelines on responses should be a priority.

Proactively, we highlighted the concept that managers must not only manage their own reputation, they must be cognizant of those in their immediate competitive environment through active screening of that environment. At any given moment, the opportunity might present itself to manage a reputational crisis, not so much of its own doing but from a rival. To respond, managers should have protocols that can be launched immediately. These protocols should cover various aspects such as marketing and public relations, legal and technical considerations. Development of those protocols should be a high priority for any organization, because when reputational spillover occurs, managers who are prepared to respond will fare considerably better than those who do not, both in the short and long term.

Notes

¹ A different version of reputation spillover has been examined previously (Mayer, 2006) as a function of a firm's performance. In this view if a firm performs poorly in an exchange the result may be a spillover to its future business with negative consequences.

² By distance we refer to path length of a network: the number of steps required to get from one organization to another.

³ It is important to note that the concept of network centrality focuses on an individual organization's location within a network. So it is an organization-level construct. By contrast, the notion of a centralized network captures how a network is structured based on the density of ties among all member organizations, so it is a network-level construct.

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Acknowledgements

We would like to thank Albert A. Cannella Jr., David L. Deephouse, Javier Gimeno, Peter S. Ring, Metin Sengul and Guest Editors Michael Barnett and Andy Hoffman, for their helpful comments and discussions. An earlier version of this paper was published in the Best Paper Proceedings of the Academy of Management (August 2002).