Conformity for legitimacy: A perspective from the learning model of firm risk-taking

Abstract

To extend the understanding of why organizations conform to institutional pressures for legitimacy, in this study, we explore if and how a learning model of risk-taking can help us to understand the cognitive underpinnings of organizational conformity for legitimacy. Based on the neo-institutional theory and the learning model of risk taking, we hypothesize that a firm is more or less likely to conform to prevailing institutional pressures depending on how firms perceive the risks associated to conformity under performance gains or losses. We also hypothesize that a firm¡s status in a hierarchical structure can further moderate this process. We test these hypotheses using a sample of U.S. venture capital firms from 1990-2003. Our results show that a firm is more likely to conform to prevailing practices and norms in the area of both gains and losses, and that the conformity tendency is stronger in the area of losses than in the area of gains. We also find that a firm¡s status significantly moderates this process. We discuss the implications of these results on theories of conformity for legitimacy, status and firm risk-taking.