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Description
The examination of top management teams represents one of the more significant areas of research in strategic management (Buchholtz et al., 2005; Finkelstein and Hambrick, 1996; Hambrick and Mason, 1984). Despite the prominence of this stream of research, a construct that has received relatively little theoretical or empirical attention in the TMT context is prestige. According to D'Aveni, prestige represents the "property of having status" (1990: 121). While recent work has investigated prestige in the context of boards of directors (e.g., Certo, 2003; Certo et al., 2001), studies of prestige have been notably absent from the TMT literature over the past decade (for a notable exception, see Higgins and Gulati, 2003).
The basic premise of D'Aveni's study is that "managerial prestige contributes to the legitimacy of firms" (1990: 121). Organizational legitimacy, which Kostova and Zaheer (1999) define as the acceptance of an organization by its environment, is an important construct in both institutional and resource dependence theories. Several authors suggest that acceptance by key environmental members is as an important organizational resource (Pfeffer and Salancik, 1978; Suchman, 1995).
One of the most significant shortcomings of research examining TMT prestige and organizational legitimacy is the inattention to the individual investors responsible for constructing perceptions of these constructs (e.g., Zuckerman, 1999); we know little about how investors gauge and respond to TMT prestige and organizational legitimacy. To address this shortcoming, we use the resource-based view of the firm (Barney, 1991) to examine two broad research questions. First, do indicators of a firm's TMT prestige and organizational legitimacy serve as intangible resources that investors take into account when evaluating the firm, its top management, its future financial performance (i.e., future earnings potential), and its future financial performance risk (i.e., the predictability of future financial performance)? (1) Second, do investor perceptions of TMT prestige directly influence their perceptions of financial performance and financial performance risk, or do investor perceptions of organizational legitimacy mediate these relationships?
To examine the link between TMT prestige and organizational legitimacy, it is important to recognize and overcome the methodological difficulties associated with each construct. Sociological literature, for example, suggests that individuals subjectively attribute prestige to another's objective characteristics (for a review of prestige studies in sociology, see Wegener (1992)). The same arguments are true for organizational legitimacy. As noted by Ashforth and Gibbs, "Legitimacy is conferred upon or attributed to the organization by its constituents ... like beauty it resides in the eye of the beholder" (1990: 177). As such, we employ a survey to directly measure investor perceptions of TMT prestige and organizational legitimacy and examine how these perceptions influence assessments of future financial performance and future financial performance risk. We believe that our work provides insights that may inform both the investment community as well as firms attempting to appeal to the investment community.
The remainder of our paper proceeds as follows. First, we provide our theoretical framework and derive specific hypotheses regarding TMT prestige and organizational legitimacy. Second, we describe our research methodology. Finally, we present and discuss the implications of our results.
CONCEPTUAL BACKGROUND AND HYPOTHESES
The resource-based view of the firm (Barney, 1991) represents one of the more well-established theoretical frameworks in strategic management. Extensions of the resource-based perspective have distinguished between tangible and intangible resources (Hall, 1993). Recent empirical work, in particular, has highlighted the importance of a number of intangible resources. For example, Roberts and Dowling (2002) found a positive relationship between a firm's reputation (derived from data in Fortune Magazine's America's Most Admired Corporations report) and its ability to sustain superior profits among a sample of Fortune 100 firms. Lee and Miller (1999) studied a sample of Korean firms and found that an organization's commitment to its employees influenced its return on assets. These studies demonstrate across a variety of contexts that intangible resources influence both firm processes and outcomes.
Based in part on the theoretical and empirical work examining the resource-based view of the firm, we examine how investor perceptions of a firm's intangible resources influence their perceptions of the firm's future financial performance and future financial performance risk. When making investment-related decisions, investors must evaluate a firm's current tangible and intangible resources for the purpose of predicting how these resources will help the firm generate future income. Typically, such evaluations combine objective analysis (e.g., what assets does a firm possess) with subjective judgments (e.g., how much future income will these assets generate).
The intangible resources that we examine are TMT prestige and organizational legitimacy. Research suggests that investors view intangible resources as being important to a firm's success. For example, Hall (1993) suggests that any premium reflected in a company's stock market capitalization as compared to the tangible resources reported in its balance sheet is due, in part, to the company's intangible resources. Hitt et al. highlight the importance of intangible resources:
Because they are socially complex and more difficult to understand and imitate, intangible resources are more likely to lead to a competitive advantage than are tangible resources (2001: 483).
In the following sections, we argue that two intangible resources, TMT prestige and organizational legitimacy, serve as signals that influence investor perceptions of a firm's future financial performance (e.g., Spence, 1973). We hypothesize that investors will associate higher future financial performance and lower future financial performance risk with firms they perceive to have more prestigious TMTs and higher levels of organizational legitimacy.
TMT Prestige as a Resource
Hambrick and Mason (1984) contend that TMTs serve as reflections of their organizations; firms with high quality TMTs should enjoy higher performance than firms with lower quality TMTs. Unfortunately, however, external stakeholders such as investors are not able to directly observe a TMT's "true" quality. D'Aveni (1990) suggests that one way external stakeholders assess a TMT's quality is through assessing the TMT's prestige. To proxy for prestige, D'Aveni aggregates a number of executive-level variables--such as education and external board seats--and affiliations with prestigious organizations--such as educational institutions, law firms, and government agencies.
TMT Prestige and Future Financial Performance. We suggest that investors consider the prestige of a firm's TMT when assessing an organization's future financial performance. From a rational perspective, TMT prestige may improve future performance by positively influencing organizational transactions (D'Aveni, 1990). For example, organizations with more prestigious TMTs may be better able to form relationships with new exchange partners, because these partners will likely enjoy higher status from such affiliations (Higgins and Gulati, 2003; Stuart et al., 1999). As Podolny points out, "ties to higherstatus actors enhance the prestige with which one is viewed" (1993: 833). In addition to helping organizations form relationships, prestige may allow TMTs to negotiate more favorable terms with its exchange partners. External stakeholders may accept better contracting terms from organizations with prestigious TMTs because the external parties may receive prestige benefits... |
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