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

Abstract

In this study, we examine the effects of illegal/unethical acts on interfirm networks. We hypothesize that the quality of network partners will decline and overall network structure will change after a firm commits an unethical act. More specifically, we posit that the decline in partner quality is primarily driven by higher quality firms leaving the network, and the focal firm being forced to replace them with lower quality ones. We also propose that partner prominence and network cohesion will be affected after these acts, and that the changes in partner quality and network structure will be greater for those acts perceived as more illegitimate. We test these hypotheses using a sample of 200 large firms in the United States and data on unethical acts by these firms. Our results show that the quality of a firm’s network partners declines after the firm’s commission of an unethical act, and that the deterioration in partner quality tends to be greater for acts of greater illegitimacy. Our results also show declines in network prominence and cohesion for firms involved in these activities. We discuss the implications of our results for the literatures on interfirm networks and unethical corporate activities.