MSU’s Yuri Mishina and colleagues argue that unrealistically high pressure on thriving companies increases the likelihood of illegal behavior, as the firms are faced with continuously maintaining or improving their performance.
Previous research suggested high-performing firms are less likely to feel the strains that can trigger illegal activities such as fraud, false claims and environmental and anticompetitive violations.
The MSU-led study, which will appear in a forthcoming issue of the Academy of Management Journal, analyzed 194 large public manufacturing firms in the United States between 1990 and 1999.
“We found that high-performing companies tended not to be able to sustain that high level of performance over time,” said Mishina, assistant professor of management and lead researcher on the project. “At the same time, high performing and highly prominent companies tend to be the ones that are punished most severely for not meeting performance expectations. And so it becomes a choice: Do I cut corners to try to meet these high performance goals and maybe get caught, or do I accept the results of not meeting my performance goals and be punished for sure.”
The pressure comes from both internal and external sources, Mishina said. Internal pressure includes company officials’ perception of how they’re faring against the competition, while external pressure is driven by heightened investor expectations brought about by strong market performance.
The researchers say three factors potentially fuel illegal behavior: loss aversion, or the tendency to prefer avoiding losses above all else; hubris, in which managers come to believe they cannot fail; and the house-money effect, or the concept that people perceive themselves to be gambling with the “house’s money” rather than their own capital.
Mishina said companies are most apt to engage in illegal activity once they become prominent and feel significant public pressure to maintain or improve performance. The research findings also suggest it’s the prospect of poor performance in the future – not the past – that compels firms to break the law.
Thus, regulators should try to monitor the activities of both high- and low-performing firms to detect illegal corporate behavior and consider a firm’s prominence and performance relative to industry peers to determine which firms should receive closer attention, the researchers say.
Mishina also said analysts, investors and company directors need to be careful about how they evaluate firm performance and the pressure they place on management to constantly improve performance.
“Obviously people want their companies to perform well, both from a revenue and profitability standpoint as well as increasing stock prices,” Mishina said. “But this implies we are in some ways missing the idea of what performance should be. Would it be better to think about maybe five-year growth or 10-year growth? Should performance be based on profitability and stock prices or should it be some sort of long-term viability measure that includes creating jobs, stimulating the economy and other factors?
“By focusing completely on fairly short-term financials we’re ignoring a lot of other things,” he added. “And the emphasis on this performance seems to be what’s driving this type of illegal behavior.”
The study is called “Why Good Firms Do Bad Things: The Effects of High Aspirations, High Expectations and Prominence on the Incidence of Corporate Illegality.” It was co-authored by Bernadine Dykes at the University of Delaware, Emily Block at Notre Dame and Timothy Pollock at Penn State.
Michigan State University has been advancing knowledge and transforming lives through innovative teaching, research and outreach for more than 150 years. MSU is known internationally as a major public university with global reach and extraordinary impact. Its 17 degree-granting colleges attract scholars worldwide who are interested in combining education with practical problem solving.
Yuri Mishina | EurekAlert!
Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik
RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung
The more electronics steer, accelerate and brake cars, the more important it is to protect them against cyber-attacks. That is why 15 partners from industry and academia will work together over the next three years on new approaches to IT security in self-driving cars. The joint project goes by the name Security For Connected, Autonomous Cars (SecForCARs) and has funding of €7.2 million from the German Federal Ministry of Education and Research. Infineon is leading the project.
Vehicles already offer diverse communication interfaces and more and more automated functions, such as distance and lane-keeping assist systems. At the same...
A research team led by physicists at the Technical University of Munich (TUM) has developed molecular nanoswitches that can be toggled between two structurally different states using an applied voltage. They can serve as the basis for a pioneering class of devices that could replace silicon-based components with organic molecules.
The development of new electronic technologies drives the incessant reduction of functional component sizes. In the context of an international collaborative...
At the LASYS 2018, from June 5th to 7th, the Laser Zentrum Hannover e.V. (LZH) will be showcasing processes for the laser material processing of tomorrow in hall 4 at stand 4E75. With blown bomb shells the LZH will present first results of a research project on civil security.
At this year's LASYS, the LZH will exhibit light-based processes such as cutting, welding, ablation and structuring as well as additive manufacturing for...
There are videos on the internet that can make one marvel at technology. For example, a smartphone is casually bent around the arm or a thin-film display is rolled in all directions and with almost every diameter. From the user's point of view, this looks fantastic. From a professional point of view, however, the question arises: Is that already possible?
At Display Week 2018, scientists from the Fraunhofer Institute for Applied Polymer Research IAP will be demonstrating today’s technological possibilities and...
So-called quantum many-body scars allow quantum systems to stay out of equilibrium much longer, explaining experiment | Study published in Nature Physics
Recently, researchers from Harvard and MIT succeeded in trapping a record 53 atoms and individually controlling their quantum state, realizing what is called a...
25.05.2018 | Event News
02.05.2018 | Event News
13.04.2018 | Event News
25.05.2018 | Event News
25.05.2018 | Machine Engineering
25.05.2018 | Life Sciences