When a Firm Turns Over a New Leaf: Organizational Learning from Concealed and Disclosed Misconduct

Abstract

This study focuses on why organizations do not learn from errors and repeatedly engage in similar errors. Assuming a violation of institutional rules as an error, we suggest that the effect of experiencing errors on organizational learning decreases when the errors are concealed from and not disclosed to the audience. More specifically, organizations more learn and reduce subsequent errors when their previous errors are exposed and recognized by institutional authorities. This is because disclosed errors alert organizations to the realization of risk and motivate them to turn over a new leaf. On the other hand, concealed errors signal that the current strategies and operations still work, and thus organizations can possess the opportunity to exploit the conduct. To test the hypotheses related to this argument, we use a data set of violations in the antitrust laws among KOSPI 100 companies in Korea over 20 years. The results present that organizations less reduce subsequent illegal actions when their previous errors were concealed, whereas they learn more and subsequently reduce misconduct when their previous ones were disclosed.