Top Management Team Prestige and Organizational Legitimacy: An Examination of Investor Perceptions (*)

The examination of top management teams represents one of the more significant areas of research in strategic management (Buchholtz et al., 2005; Finkelstein and Hambrick, 1996; Hambrick and Mason, 1984). Despite the prominence of this stream of research, a construct that has received relatively little theoretical or empirical attention in the TMT context is prestige. According to D'Aveni, prestige represents the "property of having status" (1990: 121). While recent work has investigated prestige in the context of boards of directors (e.g., Certo, 2003; Certo et al., 2001), studies of prestige have been notably absent from the TMT literature over the past decade (for a notable exception, see Higgins and Gulati, 2003). The basic premise of D'Aveni's study is that "managerial prestige contributes to the legitimacy of firms" (1990: 121). Organizational legitimacy, which Kostova and Zaheer (1999) define as the acceptance of an organization by its environment, is an important construct in both institutional and resource dependence theories. Several authors suggest that acceptance by key environmental members is as an important organizational resource (Pfeffer and Salancik, 1978; Suchman, 1995). One of the most significant shortcomings of research examining TMT prestige and organizational legitimacy is the inattention to the individual investors responsible for constructing perceptions of these constructs (e.g., Zuckerman, 1999); we know little about how investors gauge and respond to TMT prestige and organizational legitimacy. To address this shortcoming, we use the resource-based view of the firm (Barney, 1991) to examine two broad research questions. First, do indicators of a firm's TMT prestige and organizational legitimacy serve as intangible resources that investors take into account when evaluating the firm, its top management, its future financial performance (i.e., future earnings potential), and its future financial performance risk (i.e., the predictability of future financial performance)? (1) Second, do investor perceptions of TMT prestige directly influence their perceptions of financial performance and financial performance risk, or do investor perceptions of organizational legitimacy mediate these relationships? To examine the link between TMT prestige and organizational legitimacy, it is important to recognize and overcome the methodological difficulties associated with each construct. Sociological literature, for example, suggests that individuals subjectively attribute prestige to another's objective characteristics (for a review of prestige studies in sociology, see Wegener (1992)). The same arguments are true for organizational legitimacy. As noted by Ashforth and Gibbs, "Legitimacy is conferred upon or attributed to the organization by its constituents ... like beauty it resides in the eye of the beholder" (1990: 177). As such, we employ a survey to directly measure investor perceptions of TMT prestige and organizational legitimacy and examine how these perceptions influence assessments of future financial performance and future financial performance risk. We believe that our work provides insights that may inform both the investment community as well as firms attempting to appeal to the investment community. The remainder of our paper proceeds as follows. First, we provide our theoretical framework and derive specific hypotheses regarding TMT prestige and organizational legitimacy. Second, we describe our research methodology. Finally, we present and discuss the implications of our results. CONCEPTUAL BACKGROUND AND HYPOTHESES The resource-based view of the firm (Barney, 1991) represents one of the more well-established theoretical frameworks in strategic management. Extensions of the resource-based perspective have distinguished between tangible and intangible resources (Hall, 1993). Recent empirical work, in particular, has highlighted the importance of a number of intangible resources. …