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Why do good firms lose their way?

by Nancy Johnson

December 23, 2009

Business Chart


Researchers have long argued that the potential costs of getting caught decrease a prominent, high-performing firm’s need and desire to engage in illegal activities. However, recent corporate scandals involving prominent companies cast doubt on this claim.

Now, Emily Block, assistant professor of management, and colleagues have released a study  that turns the tables on the longstanding theory.

By studying high-profile manufacturing firms from the S&P 500, they discovered that these firms were more likely—not less likely—to engage in a certain class of illegal actions, such as environmental violations, fraud, false reporting and anti-competitive violations.

Why? Block argues that intense pressure to maintain abnormally high market performance and meet investor’s expectations may induce risk-seeking behavior.

What are the practical implications? Regulators are advised to consider a firm’s prominence and performance relative to industry peers in assessing which firms to closely monitor for illegal actions, while investors and directors may need to assess the pressure they place on management to constantly top their prior accomplishments.

Find out more about Block’s research, forthcoming in the Academy of Management Journal, at business.nd.edu/emilyblock