How Goal-Based Categorization Shape Negative Spillovers Among Firms:The Role of Political Connection

Abstract

This study advances and tests the notion that the phenomenon of negative spillovers— whereby bystander firms are penalized due to their similarity to perpetrator firms— is shaped by two distinct forms of categorization. We analyze how and why medias’ interpretative process following instances of corporate crisis will likely include not only prototype-based categorization but also goal-based categorization. We highlight the role and relevance of this neglected distinction by extending negative spillover predictions to include two unique predictions based on goal-based categorization. First, we propose an amplifying effect: if the perpetrator firm has political connections, which may trigger media’s goal-based categorization, then that bystander firm will suffer a more significant negative spillover effect. Second, we also posit a mitigating effect: if the bystander firms have political connections, then the negative spillover effect to bystander firms will be lessened. We find support for our hypotheses in analyses of the tenor of media coverage to corporate crisis for all China listed firms. We discuss the implications of our theoretical perspective and empirical findings for research on negative spillovers and political connections.