Standing Out or Blending In? The Formation of New Firms’ Legitimacy and Reputation under Different Levels of Market Uncertainty

Abstract

While management scholars acknowledge the importance of legitimacy and reputation for the survival and success of new firms, there is a dearth of studies examining the emergence and development of these perceptions of social approval. This paper brings together social cognition and institutional theory to explain the formation of stakeholders’ perceptions of new firms’ legitimacy and reputation and the relationships among them under different levels of market uncertainty. The theory developed in this paper challenges the assumption of institutional scholars that judgments of legitimacy precede judgments of reputation by proposing that this assumption holds under conditions of low to moderate market uncertainty typical for established market sectors, but not under conditions of high or extreme market uncertainty typical for emerging sectors. In emerging sectors new firms may be able to acquire reputation before, or simultaneously with, establishing their legitimacy, because the (lacking) legitimacy of the entire sector affects the ability of individual firms to establish their own legitimacy. These ideas can guide scholars and practitioners to better understand how to influence the processes of formation of legitimacy and reputation to the benefit of new firms.