On Loss Spillover Mechanism〔*〕

Yang Yuhong，Ni Ning，Ni Na

(1.School of Business Administration Shanghai Lixin University of Commerce，Shanghai201620;2.Department of human resource management Shanghai Normal University，Shanghai200233;3.Department of Management and Marketing Hong Kong Polytechnic University，Hong Kong)

Ⅰ.Introduction

Many conducts of organizations(including product recall and company illegal act)and scandals or organizational crisis will cause loss to organizations，which will transcend the boundary of focal organization and form spillover effect.According to literature review，researches related to loss spillover have sharply become heated.Many researches have proved that loss caused by various reasons may spill over nonfocal organizations against the background of enterprises.The majority of researchers hold that spillover is based on the generalization of the social judgments of focal organizations on the part of external audience，and further influences the social judgments and responses of other organizations，which ultimately causes loss spillover.Social judgments，as the overall criticism of external audience，include many aspects，such as reputation，status，stigma，celebrity and legitimacy.At present，reputation or legitimacy are considered the intervening variable that causes loss spillover in documents home and abroad.However，the existence of such intervening mechanism and the relationship between various mechanisms have not been proved and further explored yet.Besides，the majority of researches hold that the similarity between innocent organizations and focal organizations determines whether they will be influenced by spillover effect.However，there is no consensus on which kind of similarity decides spillover effect.

This paper tries to explore the above questions and establish a loss spillover model including organizational legitimacy to improve the present theoretical explanation and lay foundation for the future empirical study.

Ⅱ.Literature review

1.The review on the theories of loss spillover mechanism

Results caused by present，former and expected deviance may lead to loss on the part of organizations，which is referred to as loss spillover.As for the reasons of loss spillover，there are three hypotheses:

First:the hypothesis based on operating relevance expectation

This hypothesis deems that the reason of spillover is that these enterprises share the same industrial value network with focal enterprises.Therefore，the loss of one organization will affect other relevant ones，causing contagious spillover effect and competitive spillover effect.

Second:the hypothesis based on the loss spillover of organizational reputation

This hypothesis deems that the organizational reputation is the plot or medium of loss spillover mechanism.The major theoretical basis of reputation is signal theory.Organizations consist of a network due to reputation.Once the reputation of one focal organization is ruined，there will be a lack of node in this network，thus influencing the organizations nearby the node.

Third:the hypothesis based on the loss spillover of organizational legitimacy

This hypothesis deems that the organizational legitimacy is the intervening variable of loss spillover mechanism.Large quantity of researches on mechanism theory and organizational ecology has proved the existence of legitimate spillover.The idea of legitimate spillover deems that organizations of the same kind face the limit of mechanisms of the same nature，and that action mode or tendency will become similar to each other.This kind of classification is in line with the points of view of cognitive psychology put forward by Markus and Zajonc that people classify social incidents according to cognitive structures in order to understand them.

2.The discussion on the difference between the three social judgements

Operating relevance expectation，organizational reputation and organizational legitimacy are not the same by nature.Operating relevance expectation is way too different from the other two，so that won’t be covered again here.However，organizational reputation and organizational legitimacy are often confused.For instance，Goins and Gruca nearly equal organizational reputation to organizational legitimacy.Some other researchers hold that the spillover of reputation is the way to secure legitimacy.

However，many researchers have proved the difference between organizational reputation and organizational legitimacy.First，they have different disciplinary sources:reputation comes from management field while legitimacy comes from politics.Second，despite that the two have similar reason，social construction process and outcome，they are not identical.Third，in terms of the results of assessment，reputation is rival while legitimacy is non-rival.In other words，reputation is not owned by everyone while legitimacy is different.Finally，owning reputation can bring competitive edge for organizations，while the lack of legitimacy will affect the survival rate，but not vice versa.

3.The difference of the spillover deduced by the three theoretical views

According to the summary of large quantities of documents，it can be found that the three views represent three different loss spillover mechanisms.The expectation of spillover effect deduced by different spillover mechanisms can serve as the basis of the existence of such mechanism.The three views are put forward in different situations，and they can function jointly in one loss spillover incident.

Ⅲ.Research hypothesis

1.Independence of the three kinds of loss spillover

Lang and Stulz explain competitive effect by interest relations caused by operation relevance.Hertzel makes additional research to explore the effect of enterprise bankruptcy declaration on the equality value of suppliers.Research finds that unlike competitors，the equality value of suppliers will increase.According to relevant researches，operation relevance is the root cause of loss spillover.Therefore，we put forward the following hypotheses:

Hypothesis 1:The more operationally related it is between an organization and a focal organization of negative incidents，the more likely that the organization will suffer loss spillover.

In response to operation relevance，Lang and Stulz explain contagion effect by feature similarity.Chinese scholars find that companies that adopt practical methods are more unlikely to be negatively affected by the spillover of industrial scandal.Yu and Lester explicitly point out that organization with similar reputation is like a small circle，which is not necessarily directly linked.According to the above literature review，we can put forward the following hypothesis:

Hypothesis 2:the more similar it is between the practical management of organizational reputation，the greater different the reputation will be after the negative incidents.

Operation relevance and reputation cannot explain all loss spillover.Jonsson explores the scandal of Swiss fund company，and puts forward the view of legitimate loss spillover.Different from reputation similarity，organizations with same identity need not to be the same in terms of some advantageous features，and instead，they just need to have similar basic features，which is the opposite to the features of organizations with similar reputation.Therefore，we can put forward the following hypothesis:

Hypothesis 3:the more consistent it is between the basic features of identity of an organization and focal organization，the greater different the organizational legitimacy will be after the negative incident.

Jonsson and some other scholars put forward a loss spillover mechanism different from the previous ones，namely legitimate spillover mechanism.They still hold that legitimate loss spillover is not the only mechanism of the fund organizations.They put forward that similarity of organizational form is also one of the reasons of spillover.And the similarity of organizational form is feature similarity，a signal of reputation.We need to consider whether the three spillover mechanisms function separately or interactively now that the previous researchers support their existence.Based on the view that the three mechanisms are independent，we can put forward the following hypothesis:

Hypothesis 4:in terms of organizational loss spillover，performance loss expectation，reputation loss and legitimacy loss of the focal organization are respectively the necessary premise of the three performance of the affected organization.

Ⅳ.Conclusion

This paper stresses the important status of institutional perspective in the research of loss spillover from the starting point of the high dependent relationship of the legitimacy among organizations.The ideal theoretical explanation of the major type of loss spillover can be found from the institutional perspective.The three types of loss spillover mechanism，if confirmed，will change the simplified tendency of the explanation of loss spillover.The future research can follow this idea and correctly consider the complexity of loss spillover.Loss spillover is far more serious than we recognize at present.It is likely to bring breakthrough to the mechanism of loss spillover by establishing legitimate loss spillover model on the basis of absorbing the latest results of institutional theory and organizational ecology and meantime，to greatly enhance the interpretation of phenomenon by theory.

Future researchers should pay attention to that the legitimacy of single organization is interdependent on that of other organizations.The social judgement of organizational legitimacy not only rely on the pervasive rules，values and faith，but also the organizational type judgement made by external audience，which further proves that the process of legitimacy is not only a passive one that caters to the existent institution and rule，but also a positive construction process that actively influences institutional environment.

The practical significance of this paper lies in that:for common organizations，this theory is conducive to enhancing the prediction ability of loss spillover，and optimizing the strategy on negative incidents according to the understanding of loss spillover mechanism;for new organizations，this theory can deepen the understanding of the process of legitimacy and help them apply legitimacy strategy more consciously，especially legal environment selection strategy.Besides，this theory is conducive to the effective shape of the organizational identity and external communication.

Notes:

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