On the tip of the brain: Understanding when negative reputational events can have positive reputation spillovers, and for how long

Abstract

Research Summary This study contributes to the reputation spillover literature by showing how a crisis caused by a firm's capability failure enhances the reputations of its rivals. We consider how the combination of rivals' characteristics that increase their associability with the focal firm and the extent to which the crisis is salient in the minds of stakeholders can lead to positive reputation spillovers, and we also explore how long the positive reputation spillover lasts. Using a natural experiment based on the Escherichia coli outbreak in Chipotle's Seattle restaurants, we find that the reputations of other restaurants in the Seattle region were enhanced when the E. coli breakout was more salient and thus cognitively available, but only for Mexican restaurants that were geographically proximal to a Chipotle. Managerial Summary In this study we conducted a natural experiment based on Chipotle's 2015 E. coli breakout to explore how a firm's capability failure affects the reputation of its competitors. We found that failures due to firm practices that differentiate the firm from others in its industry result in positive reputation spillovers, but only for the firms that are the most similar, and only for as long as the failure is salient to stakeholders. Thus, the benefit to firms from a competitor's failure is only temporary, and will not be experienced equally.

When an Industry Peer Is Accused of Financial Misconduct: Stigma versus Competition Effects on Non-accused Firms

“…Moreover, we identify conditions under which a firm can potentially gain from accusations of financial misconduct by its peers. In so doing, we also extend research that documents more positive spillovers when a behavior can be attributed to specific characteristics of the accused peer and is thus less generalizable to other non-accused firms (Piazza and Jourdan, 2018; Paruchuri, Pollock, and Kumar, 2019; Naumovska and Zajac, 2021). Our study suggests that even when misconduct can be generalized as a result of shared industry characteristics, it can trigger positive spillovers related to the weakened competitive position of the accused peer.…”

Interorganizational Spillover: A Review and a Proposal for Future Research

“…We define reputation as “a perception representation of a company’s past actions and future prospects that describes the firm’s overall appeal to all the key constituents” (Fombrun, 1996: 72). Reputation spillover occurs when the reputation of peer organizations in the eyes of stakeholders is affected by events in focal organizations (Barnett & King, 2008; Paruchuri, Pollock, & Kumar, 2019; Zavyalova et al, 2012). The degree of reputation spillover hinges on the characteristics of the organizational form to which the stricken organization belongs, characteristics of other organizations in the same field, characteristics of the field itself, and the overall salience of a consequential event (Yu et al, 2008).…”

“…Customers may also perceive peer organizations more favorably when a focal firm suffers an adverse incident. For example, the reputations of other restaurants in the Seattle region were enhanced when the E. coli breakout struck Chipotle (Paruchuri et al, 2019). Research also suggests that investors evaluate same-category product launches more positively after focal product campaigns meet with blockbuster successes or path-breaking failures (Soublière & Gehman, 2020).…”

“…When peer organizations and their stakeholders are unaware of events, interorganizational spillover is unlikely to take place. As noted in our review sections, existing research has investigated a myriad of events that can trigger interorganizational spillover, including industry accidents (Barnett & King, 2008; Diestre & Rajagopalan, 2014), CEO dismissal (Burchard et al, 2020; Connelly et al, 2020), shareholder activism (Reid & Toffel, 2009; Shi et al, 2020), social activism (Briscoe et al, 2015; Fremeth et al, 2021), financial misconduct (Beatty et al, 2013; Paruchuri & Misangyi, 2015), scandals (Nalick et al, 2019; Piazza & Jourdan, 2018), disease outbreak (Paruchuri et al, 2019), protests (Ferguson et al, 2018; Piazza & Perretti, 2020), product recall (Zavyalova et al, 2012), and award events (Fremeth et al, 2021; Reschke, Azoulay, & Stuart, 2018).…”

If It Works Here, How Can We Make It Work Anywhere? Reputation Transfer Across Borders.

“…Prevailing literature on reputation transfer or reputation spillover has mostly focused on the transfer of reputation between different organizations. With few positive exceptions (Paruchuri, Pollock, & Kumar, 2019), scholarly attention has mostly been directed towards analyzing reputation spillover in negative or crisis situations (Norheim-Hansen & Meschi, 2020). Generally, the transfer of intangible organizational resources, such as corporate reputation, across national borders remains conceptually and empirically under-researched.…”