How Does Legitimacy Operate in Emerging Capital Markets? Investigating the Moderating Effects of Premium Listings and Firm Size on Risk

• Author: Wesley Mendes‐Da‐Silva,Luciano Rossoni
• Published date: 01 September 2019
• Date: 01 September 2019
• DOI: http://doi.org/10.1002/cjas.1496

How Does Legitimacy Operate in Emerging

Capital Markets? Investigating the Moderating

Effects of Premium Listings and Firm Size on Risk

Luciano Rossoni*

Universidade do Grande Rio

Wesley Mendes-Da-Silva

Fundação Getúlio VargasBusiness School at São Paulo and

University of Texas at Austin

Abstract

Drawing on an institutional theoretical perspective, we

investigate the impact of the origins of organizational legit-

imacy on systematic risk using a sample of 358 Brazilian

companies between the years 2002 and 2007. We regard

three origins of legitimacy—formal–regulatory (presence in

premium listings), cultural–cognitive (board of directors),

and normative legitimacy (reputation)—to empirically in-

vestigate how a company’s size and adherence to premium

lists moderate other sources of legitimacy. Our results

indicate that only under apparently better quality corporate

governance conditions—presence in premium listings—do

corporate reputation and the board of directors reduce

systematic risk. In addition, we show that the effect of repu-

tation on risk is positively moderated by f‌irm size. Copyright

© 2018 ASAC. Published by John Wiley & Sons, Ltd.

Keywords: legitimacy, systematic risk, corporate reputa-

tion, board of directors, corporate governance

Résumé

A partir d’une perspective théorique institutionnelle,

nous étudions l’impact des origines de la légitimité

organisationnelle sur le risque systématique à partir d’un

échantillon de 358 entreprises brésiliennes entre 2002 et

2007. Nous considérons trois origines de la légitimité - la

réglementation formelle (présence dans les listes de primes),

la légitimité culturelle et cognitive (conseil d’administration)

et la légitimité normative (réputation) - pour étudier

empiriquement comment la taille d’une entreprise et

l’adhésion aux listes de primes modèrent d’autres sources

de légitimité. Nos résultats indiquent que ce n’est que dans

des conditions de gouvernance d’entreprise apparemment

de meilleure qualité - présence dans les listes de primes -

que la réputation de l’entreprise et le conseil

d’administration réduisent le risque systématique. De plus,

nous montrons que l’effet de la réputation sur le risque est

positivement modéré par la taille de l’entreprise. Copyright

© 2018 ASAC. Published by John Wiley & Sons, Ltd.

Mots-clés: légitimité, risque systématique, réputation de

l’entreprise, conseil d’administration, gouvernance

d’entreprise

Introduction

There are signs that the capital market in emerging

economies such as Brazil is ineff‌icient, given its weak legal

protection for investors (Black, Carvalho, & Gorga, 2010,

2012; La Porta, Lopez-de-Silanes, Shleifer, & Vishny,

1998), and the fact that it is culturally unsupported (Aguilera

& Jackson, 2003; Fligstein & Choo, 2005).

Under such circumstances, and placing oneself in the

position of investors, what parameters would be appropriate

to assess whether a company is reliable for investment? In

addition to the f‌irm’s level of corporate governance (Black

& Kim, 2012) and the market factors commonly related to

the economic-f‌inancial analysis of companies, studies indi-

cate that investment decisions are based both on

embeddedness in social relationships (Fracassi & Tate,

2012; Granovetter, 1985) and on beliefs and values that are

institutionally legitimized in these markets (Bell,

Filatotchev, & Aguilera, 2014; Davis, 2005; Fiss, 2008;

Fligstein & Choo, 2005).

The authors would like to thank Professor Chang Hoon Oh, Associate

Editor of the Canadian Journal of Administrative Sciences, the two anony-

mous reviewers, and Professor Sandro Cabral (Insper, Brazil) for their very

helpful comments. This research received f‌inancial support from the

Conselho Nacional de Desenvolvimento Científ‌ico e Tecnológico (CNPq),

Brazil, Grant: 471930/2014-8.

*Please address all correspondence to: Luciano Rossoni, Unigranrio, Rua da

Lapa 86 Rio de Janeiro-RJ CEP 20021-180, Brazil. Email: lrossoni@gmail.com

Canadian Journal of Administrative Sciences

Revue canadienne des sciences de l’administration

36: 404–417 (2019)

Published online 27 April 2018 in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/CJAS.1496

Can J Adm Sci

36(3), 404–417 (2019)Copyright © 2018 ASAC. Published by John Wiley & Sons, Ltd. 404