Optimal Distinctiveness: Revisited Theory and Tests on Entrepreneurial Finance Markets

Abstract

Optimal distinctiveness describes a core paradox at the interface of institutional theory and strategic management: how do firms keep the balance between conforming with and being distinctive from their organizational peers? Empirical research finds inconsistent results of the position of optimal distinctiveness in different contexts. Building on the perspective of legitimacy, this paper proposes that highly distinctive firms may be perceived as morally and pragmatically legitimate in financial markets in which funders are novelty-expecting and capable of selecting high-quality firms. Thus, highly differentiated firms are legitimate in private equity and crowdfunding markets, making high distinctiveness optimal. This proposition is supported by the evidence that highly distinctive firms tend to fundraise in private equity and crowdfunding markets. Furthermore, the inclination to adopt crowdfunding is stronger if crowdfunders have a higher level of financial literacy.