How Inductive and Deductive Generalization Shape the Guilt-by-Association Phenomenon Among Firms: Theory and Evidence

This study advances and tests the notion that the phenomenon of guilt by association, whereby innocent organizations are penalized due to their similarity to offending organizations, is shaped by two distinct forms of generalization. The authors analyze how and why evaluators’ interpretative process following instances of corporate misconduct will likely include not only inductive generalization (rooted in similarity judgements and prototype-based categorization) but also deductive generalizing (rooted in evaluators’ theories and causal-based categorization). The authors highlight the role and relevance of this neglected distinction by extending guilt-by-association predictions to include two unique predictions based on deductive generalization. First, the authors posit a recipient effect: if an innocent organization falls under a negative stereotype that causally links the innocent firm with corporate misconduct, then that innocent firm will suffer a greater negative spillover effect, irrespective of its similarity to the offending firm. Second, the authors also posit a transmission effect: if the offending firm falls under the same negative stereotype, then the negative spillover effect to other similar firms will be lessened. The authors also analyze how media discourse can foster negative stereotypes, and thus amplify the two effects noted above. The authors find support for their hypotheses in an analysis of financial market reactions to corporate misconduct for all U.S. and international firms using reverse mergers (RMs) to gain publicly traded status in the U.S. The authors discuss the implications of their theoretical perspective and empirical findings for research on corporate misconduct, guilt by association, and stock market prejudice.