Too Hot to Handle and Too Valuable to Drop: An Expanded Conceptualization of Firms’ Reactions to Exchange Partner Misconduct

Abstract

Multiple theories addressing firms’ reactions to exchange partner misconduct coalesce to depict a trade-off. On the one hand, maintaining commitments to transgressors poses negative spillover risks, so theories posit firms are more likely to avoid such risks by ending commitments as negative spillover rises. On the other hand, exchange relationships often create embedded value, so theorizing also posits firms are more likely to avoid risking loss by maintaining commitments as relationships are more embedded. We argue this “maintain or end” choice oversimplifies a complex situation in which there are mixed gambles (i.e., choices offering both positive and negative outcomes). We integrate theorizing on mixed gambles and negative spillover to develop a broader conceptualization of alternative strategies for firms to reconcile these risk trade-offs beyond a binary “maintain or end” reaction, theorizing firms may: (a) increase or decrease commitments to transgressors, (b) hedge against risks by adding new partners while maintaining existing ones, or (c) “boomerang” by restarting exchange after previously ending commitments. Using firms’ relationships with politicians accused of misconduct to test our arguments, findings support our theorizing. Collectively, we offer a more complete understanding of firms’ reactions to exchange partner misconduct, extending theory and practical knowledge in multiple ways.