The Effect of Performance Feedback on Changes in Reference Groups: Evidence from Firms in the DJIA

Abstract

This study investigates the drivers of membership changes in reference groups and the primary mechanisms behind the direction of such changes from a dynamic perspective. First, this study suggests that when a firm¡¯s performance falls below aspiration levels, its likelihood of changing reference groups increases. Second, this paper examines the direction of reference group membership changes and whether upward comparisons (the extent to which a focal firm compares itself to superior rivals) increase when a firm¡¯s performance decreases below aspiration levels. Our empirical findings show that a firm whose performance falls below aspiration levels is more likely to divert its attention to other firms to obtain information and overcome a difficult situation. In addition, managers in jeopardy tend to endeavor to improve their undesirable situation by comparing themselves with superior rivals rather than distort their negative performance through comparison with inferior others. This study contributes to the literature on organizational reference groups by offering preliminary evidence on when, why, and how a firm changes its membership in reference groups.