The Effects of Interfirm Ties on Illegal Corporate Behavior

• Author: Jamie D. Collins,Christopher R. Reutzel
• Published date: 01 June 2017
• DOI: http://doi.org/10.1111/basr.12117
• Date: 01 June 2017

The Effects of Interfirm Ties

on Illegal Corporate Behavior

JAMIE D. COLLINS AND CHRISTOPHER R. REUTZEL

ABSTRACT

Although numerous benefits are associated with interfirm

ties, these external relationships can also have negative

consequences. Theoretically based in the relational com-

ponent of social capital, we identify one potentially serious

consequence of interfirm ties, propensity of firms engag-

ing in illegal behavior. Results of our study of S&P 500

firms suggest that companies benefit from a lower likeli-

hood of illegal behavior when they have numerous weak

ties to other firms. Conversely, when they become overly

embedded in a network of strong ties, they are more likely

to engage in illegal behavior. We also found evidence that

reciprocity and status similarity influence firms’ propensi-

ty to engage in illegal behavior.

Corporations account for a significant source of economic

growth and societal vitality. In fact, by reinvesting profits

regularly to increase productivity, firms contribute to eco-

nomic growth and support the view that capitalism is “... much

more than an economic system for exchange; rather, it defines

Jamie D. Collins is a Director of Center for Entrepreneurship, College of Business Administra-

tion, Sam Houston State University, Huntsville, TX. E-mail: Collins@shsu.edu. Christopher R.

Reutzel is an Assistant Professor of Management at Sam Houston State University, Huntsville,

TX. E-mail: Reutzel@shsu.edu.

V

C2017 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by

Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford OX4 2DQ, UK.

Business and Society Review 122:2 251–282

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thedominantsocialsystemofourage,onethatshapesthecul-

tural, economic, and political institutions of our lives as well as

our understanding of them and our commitment to change within

them” (Heiman 2003, p. 187). However, in recent years height-

ened scrutiny of corporate behavior is evidenced as a result of

several high-profile firms engaging in illegal behavior. Yet, the

existing literature on illegal corporate behavior covers a broad

realm of organizational activities which have been explored utiliz-

ing disparate theoretical approaches (Ashforth et al. 2008; Zeidan

2013). More work is especially needed to understand what

encourages and/or facilities this type of behavior because of its

destructive nature. To this end, we focus on the relationship

between interfirm partnership ties and a specific set of illegal cor-

porate behaviors, those involving the violation of federal regula-

tions (Sullivan et al. 2007).

Our study examines the influence of interfirm relationships on

the likelihood of engaging in illegal corporate behaviors. Under-

standing the effects of these relationships in the practice of illegal

corporate behavior contributes insight regarding whether firms’

potential contributions to society will be viewed in future years as

a net positive (Heath 2006; Rodriguez et al. 2006). Given the

growing concerns about firm behaviors, significant external pres-

sureshavebeenplacedoncorporationstoabidebyrelevantlegal

and statutory requirements (Kassinis and Vafeas 2006; Pajunen

2006; Stevens et al. 2005). Our research provides additional

insights regarding factors that provide the context in which indi-

vidual decision makers exhibit a greater likelihood to engage in

illegal behaviors.

We specifically find evidence that violations of federal regulations

can result when the firm is constrained in avenues available for

achieving and maintaining desired short-term performance levels.

Thus, this study suggests the conditions that serve as a catalyst

for decision makers within corporations engaging in illegal activity.

The results of this research show a potential “dark side” of partici-

pating in a formal network of relationships. In doing so, this study

reinforces the view that scholars and practitioners can gain value

from a holistic view of the benefits and the risks associated with

firms becoming relationally embedded in a network of interfirm

ties.

252 BUSINESS AND SOCIETY REVIEW

THEORY DEVELOPMENT

Firms’ partnership ties constitute an important form of relational

capital, i.e., potentially beneficial relationships between two or more

parties (Hitt et al. 2006; Li et al. 2008). Relational capital is a dimen-

sion of social capital (i.e., this conceptualization bifurcates the rela-

tional and structural dimensions of social capital) that represents

the outcomes derived from a relationship between two or more par-

ties (Arregle et al. 2007; Hitt et al. 2006). While much of the

research on relational capital emphasizes the benefits, this study

examines the relatively unexplored potential “dark side” of interfirm

ties (Borgatti and Foster 2003; Braendle et al. 2005; Vaughan

1999), especially the potential to engage in illegal corporate behav-

ior. Prior research has examined multiple different influences on

corporate deviance (Baumer 2007; Brass et al. 2004; Jehn and Scott

2015; Vaughan 1998), but relatively few studies have investigated

the link between partnership ties and illegal corporate behavior (Col-

lins et al. 2009; Vaughan 1999). The research reported herein focus-

es on the potential disadvantages of firms’ portfolios of

relationships, particularly their influence on providing an environ-

ment in which potential illegal corporate behaviors can arise.

The topic of corporate illegal activities is particularly salient for

top decision makers within an organization (Baumer 2007). Prior

research suggests that engaging in illegal behavior can become

accepted practice within organizations. Related research also

suggests that while relational ties facilitate exchange and dis-

courage opportunism among partners, they also increase oppor-

tunities for deviant and/or illegal behavior (Anderson and Jap

2005; Bernard 2006). Relational ties serve as conduits of knowl-

edge between partners, mechanisms for enforcement of perfor-

mance expectations, and catalysts for identifying new economic

opportunities. Such ties are frequently utilized to increase the

rate of interactions, build trust and facilitate the flow of informa-

tion among the actors. However, prior research has argued

broadly that these ties can become catalysts for illegal behavior

by partnering firms (Baker and Faulkner 1993; Baumer 2007;

Buchan 2005). We now turn to addressing the characteristics of

the relational ties between partner firms that can influence the

likelihood that managers within firms make choices that lead to

253COLLINS AND REUTZEL