High‐Reputation Firms and Their Differential Acquisition Behaviors
| DOI | http://doi.org/10.1002/smj.2645 |
| Date | 01 November 2017 |
| Published date | 01 November 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 2237–2254 (2017)
Published online EarlyView 21 March 2017 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2645
Received 7 April 2013;Final revision received5 December 2016
High-Reputation Firms and Their Differential
Acquisition Behaviors
Jerayr J. Haleblian,1Michael D. Pfarrer,2*and Jason T. Kiley3
1School of Business, University of California-Riverside, Riverside, California
2Department of Management, Terry College of Business, University of Georgia,
Athens, Georgia
3Department of Management, Spears School of Business, Oklahoma State
University, Stillwater, Oklahoma
Research summary: Emerging reputation research suggests that high-reputation rms will act to
maintain their reputations in the face of high expectations. Yet, this research remains unclear
on how high-reputation rms do so. We advance this research by exploring three questions
related to high-reputationrms’ differential acquisition behaviors: Do high-reputation rms make
more acquisitions than similar rms without this distinction? What kind of acquisitions do they
make? How do investors reactto high-reputation rms’ differential acquisition behaviors? Wend
that high-reputation rms make more acquisitions and more unrelated acquisitions than other
rms. Yet, we also nd that investors bid down high-reputation rms’ stock more than other
rms’ in response to acquisition announcements, suggesting that investors are skeptical of how
high-reputation rms maintain their reputations.
Managerial summary: We know that high-reputation rms wish to maintain their elite standing
in the face of high-market expectations, but we know little about how they do so. We explore this
puzzle by investigating how reputation maintenance inuences high-reputationrms’ acquisition
behaviors. We classify high-reputation rms are those rms that make Fortune’s Most Admired
annual list, and we nd that high-reputation rms make more acquisitions and more unrelated
ones than other rms. Surprisingly, we also nd that the market tends to react negatively to these
acquisitions. Thus, managers may want to reconsider their strategy of making acquisitions as a
means to maintain their rms’ high reputations. Copyright © 2017 John Wiley & Sons, Ltd.
Introduction
Firms engage in multiple thousands of acquisi-
tions annually with volume in the trillions of U.S.
dollars (Strumpf & Jarzemsky, 2014). Yet, despite
their prevalence, questions remain about rms’
acquisition behaviors (Barkema & Schijven, 2008).
Keywords: rm reputation; social evaluations; mergers
and acquisitions; panel data; event study
*Correspondence to: Michael D. Pfarrer, Department of Manage-
ment, Terry College of Business, University of Georgia, 600 S.
Lumpkin St., Athens, GA 30602. E-mail: mpfarrer@uga.edu
Copyright © 2017 John Wiley & Sons, Ltd.
Drawing from emerging reputation research (e.g.,
Mishina, Dykes, Block, & Pollock, 2010; Petkova,
Wadhwa, Yao, & Jain, 2014; Rindova, Williamson,
Petkova, & Sever, 2005; Zavyalova, Pfarrer, Reger,
& Hubbard, 2016), we address these questions
by isolating an important subset of rms not yet
directly explored within the acquisitions literature:
high-reputation rms.
High-reputation rms are a distinct subset of
rms that have consistently met their stakehold-
ers’ expectations of delivering highly valued out-
comes over time (Lange, Lee, & Dai, 2011; Petkova
et al., 2014; Pfarrer, Pollock, & Rindova, 2010;
Rindova et al., 2005). A rm may have different
2238 J. J. Haleblian, M. D. Pfarrer, and J. T. Kiley
reputations with different stakeholders, who may
have different perceptions of “highly valued out-
comes” (e.g., Barnett, Jermier, & Lafferty, 2006;
Flanagan, O’Shaughnessy, & Palmer, 2011; Lange
et al., 2011; Rindova et al., 2005). In the context
of our study, we argue that a specic constituency,
investors, rewards a small group of exceptional
rms with high reputations based on these rms’
abilities to consistently meet investors’ expectations
of high growth, value, and quality (Flanagan etal.,
2011).
However, investors also expect high-reputation
rms to deliver higher levels of growth, value,
and quality relative to similar rms without this
distinction (Cabral, 2016; Fombrun, 1996; Graf-
n, Bundy, Porac, Wade, & Quinn, 2013; R. K.
Merton, 1968; Mishina et al., 2010; Petkova etal.,
2014). Correspondingly, we assert that investors
hold high-reputation rms to higher expectations
than other rms. We suggest that because of these
expectations, high-reputation rms engage in dif-
ferential acquisition behaviors to maintain their
reputations. Specically, we explore three ques-
tions related to high-reputation rms’ acquisition
behaviors: Do high-reputation rms make more
acquisitions than other rms? What kind of acqui-
sitions do they make? How do investors react
to high-reputation rms’ differential acquisition
behaviors?
Regarding our rst question— acquisition
number— we nd that high-reputation rms make
109% more acquisitions in the year following their
classication than other rms during the same win-
dow. Regarding our second question—acquisition
type— while we show no difference between the
size of high-reputation rms’ acquisitions and
others rms, we do show that high-reputation
acquisitions were 83% higher in unrelatedness.
Regarding our nal question— investor
reaction— while high-reputation rms appear
compelled to make acquisitions in order to main-
tain their reputations, we nd that investors in
our sample responded negatively to the mean
acquisition announcements of high-reputation
rms (mean CAR =−0.005), but responded pos-
itively to the mean acquisition announcements
of other rms (mean CAR =0.001). Specically,
a high-reputation rm with a $50 billion market
capitalization would encounter a $300 million
acquisition penalty versus a similar rm without a
high reputation. These ndings suggest that while
high-reputation rms seek to maintain reputation
through differential acquisition behaviors, the
market remains skeptical of this approach.
Our work adds to the literature on high-reputation
rms in several ways. First, we extend emerg-
ing reputation research by exploring how
high-reputation rms maintain their reputa-
tions in the face of high expectations. Second, we
contribute to research on high-reputation rms
by focusing on the role this distinction plays
in affecting a signicant and prevalent strategic
activity. Finally, we illuminate investors’ negative
reactions to high-reputation rms’ differential
acquisition behaviors, suggesting a mismatch
between reputation maintenance and investors’
expectations.
Study Framework
Organizational research on rm reputation contin-
ues to evolve (cf. Barnett etal., 2006; Deephouse,
2000; Fombrun, 1996; Pfarrer et al., 2010; Rindova
et al., 2005; Zavyalova et al., 2016). In a recent
review and extension of this research stream,
Lange and colleagues (2011) described reputation
as the perception that a rm is meeting specic
stakeholders’ expectations of delivering highly
valued outcomes over time. Similarly, Petkova
and colleagues (2014) described reputation as
the perception of a rm’s ability to consistently
deliver high value to specic stakeholders along
salient dimensions. In line with these descriptions,
we conceptualize and empirically represent rm
reputation as the perceptions of a specic stake-
holder group, investors, about the rm’s ability to
meet their expectations of high growth, value, and
quality (cf. Flanagan et al., 2011).
We are interested in high levelsof rm reputation
(“high reputation”). At these levels, reputation can
accrue benets for a rm, including better access to
resources and greater nancial performance (Dier-
ickx & Cool, 1989; Pfarrer et al., 2010; Rao, 1994;
Rao, Greve, & Davis, 2001; Rindova, Pollock, &
Hayward, 2006; Zavyalova etal., 2016). External
observers can distinguish the importance of these
benets relative to rms that do not possess a
high reputation and that have not consistently met
observers’ expectations of delivering highly valued
outcomes (Burson, Larrick, & Lynch, 2009; Janicik
& Larrick, 2005; Rao, 1994). In the context of our
study, we argue that investors cognitively isolate a
small group of exceptional rms and reward them
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2237–2254 (2017)
DOI: 10.1002/smj
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