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

• Date: 01 December 2019
• Author: Srikanth Paruchuri,Naveen Kumar,Timothy G. Pollock
• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/smj.3043

RESEARCH ARTICLE

On the tip of the brain: Understanding when

negative reputational events can have positive

reputation spillovers, and for how long

Srikanth Paruchuri

1

| Timothy G. Pollock

2

| Naveen Kumar

3

1

Management & Organizations Department,

Smeal College of Business, The

Pennsylvania State University, University

Park, Pennsylvania

2

Haslam College of Business, University of

Tennessee-Knoxville, Knoxville, Tennessee

3

School of Business, University of

Washington, Bothell, Washington

Correspondence

Srikanth Paruchuri, Management &

Organizations Department, Smeal College

of Business, The Pennsylvania State

University, University Park, PA 16802.

Email: sup28@psu.edu

Abstract

Research Summary:This study contributes to the reputa-

tion 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' charac-

teristics 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 res-

taurants that were geographically proximal to a Chipotle.

Managerial Summary:In this study we conducted a natu-

ral experiment based on Chipotle's 2015 E. coli breakout

to explore how a firm's capability failure affects the repu-

tation 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.

KEYWORDS

associability, capability failures, reputation spillovers, salience, scandal

Received: 4 January 2018 Revised: 13 March 2019 Accepted: 5 April 2019 Published on: 30 May 2019

DOI: 10.1002/smj.3043

Strat Mgmt J. 2019;40:1965–1983. wileyonlinelibrary.com/journal/smj © 2019 John Wiley & Sons, Ltd. 1965

Drama does not just walk into your life. Either you create it, invite it or associate with

it.—Unknown

1|INTRODUCTION

When you read about a negative event occurring, how widely do you spread the blame? For example,

if you read that a pledge suffered a serious injury during a fraternity hazing incident, would that affect

your view of just that particular fraternity chapter, the whole fraternity system at the school, the Univer-

sity in its entirety, or the fraternity system writ large? And would your perceptions of the entities

beyond the local fraternity chapter be more negative, or more positive? These questions lie at the heart

of research on reputation spillovers, which considers how a focal firm's actions can affect the reputa-

tions of other firms in the same category (e.g., Barnett & King, 2008; Zavyalova, Pfarrer, Reger, &

Shapiro, 2012)—inother words, how the drama created by one firmaffects others associated with it.

A major, but generally untested assumption underlying these questions and concerns about reputation

spillovers is that other firms are seen as being similar enough to the focal firm to experience a reputation

spillover if they are members of the same broad category, often empirically identified as firms in the same

SIC code designation or via some other externally determined categorization scheme. However, determin-

ing category membership can be complex (e.g., Durand & Paolella, 2013; Porac, Thomas, Wilson,

Paton, & Kanfer, 1995; Reger & Huff, 1993), and different, more specific combinations of characteristics

may be used to determine the associability (Durand & Paolella, 2013) of different firms with the focal

actor, which can influence whether or not others are affected by the reputation spillover.

A second frequent, but generally untested assumption in reputation spillover research is that the

spillover effects will be enduring, at least to some degree. This assumption is important because it

determines whether reputation spillovers really affect this intangible asset in a significant way, and

whether firms should take steps to try and mitigate the potential damage, or leverage anticipated

gains. However, most research on reputation spillovers has tended to focus on short-term financial

outcomes such as cumulative abnormal market returns in the days following the event

(e.g., Barnett & King, 2008; Gomulya & Mishina, 2017; Paruchuri & Misangyi, 2015), or on strate-

gic actions designed to mitigate potential spillovers (e.g., Durand & Vergne, 2015; Zavyalova et al.,

2012), rather than more directly assessing its effects on other firms' reputations. These short-term

outcomes provide little insight into whether spillover effects endure once the salience of the negative

event has abated—that is, whether the event continues to affect others' reputations once the crisis is

no longer cognitively available and on the “tip of stakeholders' brains.”

Further, most research on reputation spillovers has focused on situations where a focal firm's neg-

ative action has negative spillover effects. We are aware of only one study where the valence of the

spillover is different than the valence of the action—that is, where a negative action has a positive

spillover effect on others. Piazza and Jourdan (2018) found that when the Catholic Church became

embroiled in sex scandals in the United States, other Christian denominations that were perceived as

having stricter standards of conduct were able to increase their membership at the Catholic Church's

expense. While they explored this effect over a long time period, the “pedophile priest”sex scandals

continued to be in the news during the entire period of their study, keeping the Catholic Church's

wrongdoing cognitively available (Fiske & Taylor, 1991; Tversky & Kahneman, 1973) in the minds

of parishioners, and thus a continued focus of their attention. They also inferred reputational effects

1966 PARUCHURI ET AL.