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The Dynamics of Organizational Status
Article  in  Industrial and Corporate Change · February 1996
DOI: 10.1093/icc/5.2.453 · Source: RePEc
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The Dynamics of Organizational
Status
JOEL M. PODOLNY AND DAMON J. PHILLIPS
(Graduate School of Business, Stanford University, Stanford CA 94305-5015, USA)
This paper examines, the growth (and decline) of organizational status. It is argued
that an organization's status is determined by two factors: past performance outcomes
and the status of the organization's affiliates. The better the past performance out-
comes and the higher the status of the affiliates, the greater the organization's growth
in status. This basic proposition is tested in an examination of status changes among
investment banks in the non-investment grade market between 1981 and 1987.
Implications and extensions are discussed in the conclusion.
1. Introduction
A market exchange is typically understood as a relationship between two
parties that involves the manifest transfer of goods or services. When two
parties enter into an exchange relation, they do so because each is willing to
give something that the other values more than he or she does. This
assertion—that the essential function of exchange relations is the purposive
s transfer of goods from those who value them less to those who value them
- more—has such prima faciae validity that it seems almost purposeless to
™ label it as an assumption.
| In this paper, it is argued that market exchanges often involve not only
z the manifest transfer of goods and resources, but the latent transfer of status.
'g To the extent that actors in a market can be arrayed in terms of status and to
£ the extent that exchanges can be witnessed or verified by third parties, actors
t transfer some of their status when they enter into exchanges with oneanother. More specifically, it is contended that an actor's status is a direct
I function of the average status of the actor's affiliates. The lower the status of
,2 the actor's affiliates, the lower the actor's status. Conversely, the higher the
I status of an actor's affiliates, the higher the actor's status.
I Put another way, market exchanges are not only important as conduits of
J © Oxford University Press 1996
— 453
The Dynamics of Organizational Status
resources and goods, but as determinants of identity. How an actor is per-
ceived is affected by who that actor selects as exchange partners. These per-
ceptions, in turn, affect future opportunities that the actor confronts in the
market. In this way, the latent function of status transfer has a significant
impact on the manifest function of resource exchange.
The paper is organized as follows. First, the essential features of the socio-
logical conception of status are discussed: what it is, what are its deter-
minants, and what are its advantages. It is argued that status can best be
understood as a 'stock' of accumulated deference, that status has a dual foun-
dation in past performance and an actor's affiliations, and that the possession
of status carries a number of economic benefits. While previous empirical
research has provided evidence of the economic benefits of status, there is at
best only indirect evidence that the origins of status are in both past perform-
ance and an actor's affiliations. In effect, there has been little empirical
investigation into the dynamics of status. Therefore, an empirical study of
these dynamics within the context of a particular market is undertaken, the
market for non-investment grade debt. Implications and extensions are dis-
cussed in the conclusion.
2. What is Status?
We will attempt to discuss status in the most general terms possible, draw-
ing on illustrations from diverse contexts. The reason for this is to under-
score the extent to which status processes in a market are extremely similar
to status processes in other domains.
The sociological conception of status is intimately linked to the concept
of deference (Goode, 1978; Blau, 1964). If deference can be understood as a
'flow', then status is the 'stock' that corresponds to this flow (Parsons, 1963).
Deference may take a number of forms, and these forms will typically differ
by context. An important task of the researcher is to identify which behaviors
constitute the salient acts of deferencethat give rise to status distinctions. In
Blau's (1955) study of a government bureaucracy, an auditor acquires status
to the extent that others defer to that auditor's advice. Other forms of de-
ference include the conferral of awards or imitation of practices. Consider the
technological domain. In selecting a particular innovation as a foundation
for its research, a focal organization defers to the developer of the invention
by implicitly affirming that this innovation is superior to other innovations
that could have been the foundation for the focal organization's research (cf.
Podolny and Stuart, 1995). Similarly, in the scientific domain, a positive citation
is an act of deference; it is an acknowledgment of the relative importance of
a scholar's work as a foundation for. future research in the field.
454
The Dynamics of Organizational Status
Status carries with it the attribution of superior quality. Or, to put the
same statement in economists' terms, status is a signal of quality. Higher
status athletes are expected to provide superior athletic performances; higher
status scientists are expected to write more important papers. Higher status
firms are expected to produce superior products. Put generally, high
status actors are expected to engage in higher quality activities than lower
status actors.
3. What are the Determinants of Status?
One may ask why high status actors receive the attribution of high quality.
That is, why is status a signal of quality? One (obvious) reason is that an
actor's status is determined in part by past demonstrations of quality. More
specifically, an actor's status is determined by the value that the actor has
provided to the community of which the actor is considered a part, and the
quality of what an actor provides is an important determinant of its value.
Thus, in Blau's study of bureaucracy, the deference that is shown to a
bureaucrat is a function of the quality of previous advice that the bureaucrat
has provided to his colleagues.
Of course, if status were only determined by the value of the actor's pre-
vious efforts, then it would differ little from the concept of reputation.
What makes status distinct from reputation is that it derives not only from
past added value, but also from the status of those with whom the actor
engages in exchange relations. When actors enter into relations with one
another, a transfer of status takes place.
The latent transfer of status in social exchange systems is well acknowl-
edged and well documented in sociological and anthropological research.
Consider the following illustration from Elias and Scotson's (1965) examina-
tion of an English village. In commenting on a newcomer's entry into and
subsequent ostracism from one of the more established sections of town, the
authors write:
Newcomers who settled in the 'good streets' of the 'village' were always
suspect unless they were obviously 'nice people'. A probationary period was
needed in order to reassure the good families that their own status would
not suffer by association with a neighbour whose standing and whose standards
were uncertain. The ostracized 'black sheep' was in this case a woman who
had recently moved into the neighbourhood and who made the following
comments when she herself was asked about her relations with her neigh-
. bours: They're very reserved. They speak on the streets but nothing else.'
She then told how she had asked the 'dustmen in for a cup of tea one cold
day', soon after she arrived . . . They saw it. That shocked them around
here.'
455
The Dynamics of Organizational Status
While the manifest exchange was the cup of tea for the work that the dust-
men had performed on the cold day, the latent transfer was of the status of
the dustmen to the status of the newcomer.
Several features of this transfer of status are noteworthy. First, the feet
that the woman is a newcomer means that there is considerable uncertainty
about her true moral character. If the townspeople had more unequivocal
evidence of her true character, then this one interaction would most likely
not have had as great an impact on perceptions. In this paper, we will not
say much more about how the level of uncertainty affects the extent of status
transfer between actors; this topic has been addressed elsewhere (Podolny,
1994).
For this paper, we are more interested in the factors that distinguish the
transfer of status from the transfer of goods or resources; In our view, there
are at least two such factors. The first is that the transfer of status lays
beyond the intentionality of actors. The dustmen did not choose to give the
newcomer their status. Nor could the woman choose to refuse the conferral
of status. There is a thus a forced alienation of status that is typically not
found in the transfer of more conventional goods and services. A second dis-
tinguishing factor is that the transfer of status requires at least one third
party as a witness to the act or as an examiner of evidence that the act took
place. This second fact is important because there is a general tendency to
assume that the dyad is the fundamental unit of exchange (e.g. Williamson,
1975). However, if the exchange involves the flow of status, then the value
of what is exchanged cannot be measured independently of third parties. In
order for Robinson Crusoe and Friday to exchange status, a third party
would need to be on their island.
4. What are the Advantages of Status?
Regardless of domain, the expectation of higher quality from those who are
higher in status generally results in cumulative advantages to the possession
of status. To the extent that others have an expectation that the performance
of a high-status actor will be superior, these others are more willing to com-
mit resources to the actor. With these greater resources, the actor will be
able to improve his or her performance, which will increase his or her status
to a greater extent, which in turn will increase the resources on which the
actor can draw, and so on.
Merton (1968) neatly summarized the cumulative benefits of status under
the label of the Matthew Effect. Merton derived the term the Matthew
Effect from a quote in the book of Matthew, which reads 'For unto everyone
that hath shall be given, and he shall have abundance; but from him that
456
The Dynamics of Organizational Status
hath not shall be taken away even what he hath." Merton himself considered
the significance of the Matthew Effect within the field of scientific activity.
Higher status scientists are more likely to receive greater rewards for a given
quality effort. For example, an article of a given quality is more likely to be
widely read and cited if its author is high-status than if its author is low-
status. This different return to the same quality effort, in turn, is likely to
increase the status differential between the high-status and low-status actor.
While Merton analyzed the Matthew Effect among scientists, the Matthew
Effect has been documented in a variety of domains.
Podolny (1993) discusses the manifestation of the Matthew Effect in the
market context. To the extent that potential exchange partners expert that a
higher status actor offers a higher quality product or service, they will be,
more likely to pay a higher price for that same good. Yet, not only does the
possession of status increase the potential revenue of a producer, the possession
of status lowers the costs for producing a good of a given quality. Indeed,
higher status actors may produce higher quality goods and therefore have
higher costs, but if we control for the quality of the good produced, then
higher status actors should have lower costs. The more that individuals
believe that a high status actor's good is above a given quality threshold, the
less that the producer needs to offer warranties or other contract-related
mechanisms to convince potential buyers that his or her good is above a
particular quality threshold. In effect, the transaction costs for higher statusactors should be lower than the transaction costs for lower status actors,
especially if we define transaction costs broadly as the costs of consummating
a transaction between a buyer and seller.
Higher status actors are also more likely to have control over the direction
of innovative activity within a particular technological domain. The higher
an actor's status, the more that others expect that the areas in which the
actor works will be areas for promising research activity. These favorable
expectations in turn lead to a greater amount of research in directions
pioneered by that actor (Podolny and Stuart, 1995).
5. What Do We Know (and Not Know) Empirically About the
Operation of Status in Markets?
To date, there is at least some limited evidence that the possession of status
provides a number of economic benefits, including lower costs (Podolny,
1993; Smith, 1993), higher prices (Podolny, 1993; Benjamin, 1994), and
increased growth (Podolny et al., 1995).
We also know that the positive returns to an actor's status are associated
with the risk or uncertainty regarding the quality of the actor's efforts
• 457
The Dynamics of Organizational Status
(Podolny, 1993; Podolny et al., 1995). This positive effect of risk or un-
certainty on the returns to status derives from the fact that status is an indi-
cator of quality. The more that quality is observed independently of status,
the less value comes from possession of the indicator.
Not only do the returns to status increase with uncertainty, so does- the
attention that actors pay toward the status of their affiliates when selecting
exchange partners. In contexts where there is considerable uncertainty or
ambiguity about quality, actors are extremely reluctant to engage in
exchange relations with those who are lower in status than themselves. In
contrast, as uncertainty or ambiguity about quality declines, actors are more
willing to engage in exchange relations with those who are lower in status
(Podolny, 1994).
Yet, while there is some evidence that the possession of status has positive
economic benefits and that the effects of and attention to status increase
with uncertainty, there is little evidence to date that the dynamics of status in
markets are the same as the dynamics of status in other contexts. More
specifically, there is little evidence that status in markets has the dual foundation
in past performance and patterns of affiliations or that the advantages of
status are cumulative over time. In the next section, a general model for
testing these predictions regarding the growth (and decline) of status in the
market context is briefly discussed. Following this general model, we proceed
to a discussion of the context in which we shall test this model, the primary
securities market for non-investment grade debt.
6. A Model of the Growth (and Decline) of Status
Let S/, denote the status of organization / during period /. We are interested
in the relative change in status that occurs between two time periods:
(Sjt+i/Sj,). We adopt the following specification as a baseline model:
J« wi,t+l
or, alternatively
o _ CP+1TO'
where usjr,+l is a log-normally distributed error term and p is essentially an
endogenous feedback effect. If p < 0, then there are diminishing returns to
increases in status. If p = 0, the growth in status is consistent with Gibrat's
law, which posits that growth is random and independent of size (or, in this
case, the amount of status), though the magnitude of fluctuations is propor-
tionate to size. If p > 0, growth in status has a positive effect on itself and is
458
The Dynamics of Organizational Status
therefore explosive. If p = 0 or p > 0, there is no endogenous bound on the
amount of status that an actor can have. This general baseline model is the
same as those employed in models of organizational growth (e.g. Barnett,
1994; Barton etal., 1994).
It should be relatively apparent that Merton's Matthew Effect is consis-
tent with p > 0. If p > 0, then high-status organizations increase their sta-
tus at a faster rate than low-status organizations. However, Merton's
Matthew Effect is also consistent with p = 0 since the absolute status differ-
ence between a low-status organization and a high-status organization will
increase if both organizations have the same growth rate.
We incorporate exogenous covariates into the model using a log-linear
specification as follows:
>>i,t+l * it e wi,t+\ \ 1 '
where A; denotes the average status of firm i's exchange partners prior to
/+1 and P; refers to firm i's contribution/performance prior to t+l. We use
a log-linear specification of exogenous effects to ensure that the predicted
growth rate for status is non-negative. The preceding discussion implies that
bx > 0; b2 > 0.
By taking the logarithm of both sides of the equation, this model can be
estimated using OLS techniques.1
Given this general model, we turn to a consideration of the determinants
of status in a particular market, the market for non-investment grade debt.
In undertaking this examination, we try to find out whether or not the same
dynamics that apply to the newcomer and the dustmen in Norbert and Elias'
English town also apply to Morgan Stanley, Goldman Sachs and the other
firms in the investment banking industry.
7. Primary Securities Market for Non-investment Grade Debt
The function of investment banks in the primary securities markets is to act
as intermediaries between corporations needing financial capital and
investors seeking to maximize the return on their financial investment. In a
service referred to as 'underwriting', investment banks purchase securities
1 An alternative specification for this model would replace A,- with (A,—5U). This specification posits
that a firm's growth rate should increase if the average status of a focal firm's partners is greater than the
focal firm's status and that the growth rate should decrease if the average status of those partners is less
than the status of the focal firm. The disadvantage of this specification is that it makes the effect of Sh on
the growth rate quite complicated. That being said, analyses were conducted with this alternative specifi-
cation, and the effects of the exogenous covariates were qualitatively similar to those that we report in
this paper.
459
The Dynamics of Organizational Status
from corporations and then resell these securities to investors. The price that
investment banks charge for this service is referred to as the spread, which is
the difference in the dollar amount between what the investment bank pays
for the security and the dollar amount that the investment bank receives for
the security.
Corporate securities can be divided into two general classes: equity and
debt. A holder of equity is an owner of the corporation and has a residual
claim on the profits of the corporation. A holder of debt has a claim to a cor-
poration's repayment for money loaned to the corporation. There are two
broad classes of debt, investment grade and non-investment grade, where
the latter of these two forms of securities is sometimes referred to as high-
yield or junk debt. Formally, what distinguishes investment grade from
non-investment grade debt are the financial ratings of the issuing corporation
given by the Moody's and Standard and Poor's bond rating services. Generally,
issuers of non-investment grade debt are younger and smaller than the
issuers of investment grade debt, though even very large and old companies
may issue junk debt if their ability to make payments on the debt is in serious
enough doubt.
We will focus on status dynamics in the US non-investment grade market.
Unlike the US investment grade market, which came into existence before
the turn of the century, the market for non-investment grade debt is quite
young. The first non-investment grade issue was underwritten by the invest-
ment bank Drexel Burnham Lambert in 1978, and the non-investment
grade market did not come to be generally recognized as adistinct market
until the early 1980s. Our analysis covers the period 1981 to 1987. By
focusing on a time period that essentially goes back to the market's earliest
stages, one is generally able to capture all of the events that could poten-
tially affect an organization's status in that market.
Despite often intense competition among investment banks for the right
to lead an underwriting, banks frequently do not perform underwritings by
themselves. Rather, they form and lead syndicates. A syndicate is a collec-
tion of banks that jointly purchase the securities from the corporation and
reissues the securities to investors. Syndicates can consist of as many as 50
other banks, although the typical size is more in the order of 10 or 20. The
bank that puts together the syndicate is referred to as the lead manager. Par-
ticularly for issues involving a large number of banks, a lead manager will
frequently select one or several co-managers to assist in the offering.
The manager-co-manager relations are the most visible and significant
exchange relations in the syndicate. The lead managers and co-managers
typically underwrite a much larger proportion of the security offering than
the other members of the syndicate. In addition, co-managers may assist the
460
The Dynamics of Organizational Status
lead manager by either performing 'due diligence' to validate the financial
soundness of the corporation, recruiting banks into the syndicate, determin-
ing the allocation of securities among syndicate members, or 'making a
market' for a security once the security has been distributed to investors and
is being bought and sold in the secondary markets.
Due to the visibility of these manager-co-manager relations, we will
focus on how the status of a bank's management partners affects a bank's
own status. Following from the arguments developed above, it is expected
that by controlling for the past performance of a bank, the average status of
a bank's management partners will have a positive effect on a bank's own
subsequent status.
8. Measuring Status
One of the advantages of studying status in the investment banking industry
is that the deference ordering among investment banks is codified in what
are called 'tombstone advertisements', the announcements of security offer-
ings that appear in major business newspapers such as The Wall Street Journal
or trade publications like Investment Dealer's Digest. Figure 1 presents an
example of a tombstone advertisement. The lead manager of the syndicate is
always listed in the upper left hand of the syndicate. Shearson Lehman
Hutton is the lead manager in Figure 1. Co-managers are listed to the right
and possibly down from the lead manager. Drexel Burnham Lambert is the
co-manager in the figure.
The rest of the syndicate is listed beneath the lead manager and the co-
manager and is divided into what are called 'brackets'. A bracket is an alpha-
betically ordered group of banks. In Figure 1, the first bracket begins with
Bear, Stearns and Co. and ends with Dean Witter-Reynolds. (Dean is a first
name, rather than a last name, so the bank's alphabetical position is deter-
mined by Witter.) If a bank is regarded as slightly higher in status than
those banks in one bracket but lower in status than those banks in another
bracket, then the bank appears in what is called an 'out-of-order' bracket. In
Figure 1, A. G. Edwards and Sons appears in this out-of-order position,
beneath the bracket ending with Dean Witter-Reynolds and before the
bracket starting with Advest, Inc. Advest, Inc. begins a large bracket, which
includes all banks between it and Wheat First Butcher & Singer. The final
bracket begins with Robert JW Baird & Co. and ends with Stifel, Nicolaus,
and Company.
A bank's bracket is strictly a function of a bank's status. A bank will
remove itself from an underwriting if the bank is offered a bracket position
461 =
The Dynamics of Organizational Status
This announcement is neither an offer to sell nor a solicitation of an offer to buy these securities.
The offer is made only by the prospectus.
December 6,1989
2,000,000 Shares
Common Stock
Price $20 X Per Share
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated only from such of the undersigned as may legally
offer these securities in such State.
Shearson Lehman Hutton Inc. Drexel Burnham Lambert
Incorporated
Bear, Stearns & Co. Inc. Goldman, Sachs & Co. Kidder Peabody & Co.
Incorporated
Merrill Lynch Capital Markets Paine Webber Incorporated Prudential-Bachc Capital Funding
Smith. Barney, Harris Upham & Co. Dean Witter-Reynolds Inc. A.G. Edwards & Sons, Inc.
Incorporated
Advest, Inc. William Blair & Company Blunt Ellis & Loewi J.C. Bradford & Co.
Dain Bosworth Edward D. Jones & Co. Ladenburg, Thalmann & Co., Inc.
McDonald & Company Neuberger & Berman Oppenheimer & Co., Inc.
Securities, Inc.
Piper, Jaffray & Hopwood Prescott, Ball, & Turben. Inc. The Robinson-Humphrey Co., Inc.
Tucker Anthony Wheat First Butcher & Singer
Incorporated Capital Markets
Robert JW. Baird & Co. George K. Baum & Company B.C. Christopher Securities & Co.
Cowen & Co. Gabielli & Company, Inc. Mabon. Nugent & Co.
Rodman & Renshaw, Inc. Smith, Moore, & Co. Stifel. Nicolaus, & Company
Incorporated
FIGURE 1. Example of a tombstone advertisement.
that the bank's managers believe to be beneath the bank's status. In 1985,
Goldman Sachs sought to divide the second most prestigious bracket into an
upper and lower tier; nine of those banks that were to appear in the lower
tier withdrew from this offering (Wall Street Journal, 15 January 1986, p. 1).
In 1987, five high status banks refused to participate in an offering of the
Farmers Home Administration when the issuer wished to place 13 small,
462 '•
The Dynamics of Organizational Status
regional, minority-owned firms in a higher bracket than those five major
firms (New York Times, 21 September 1987, p. Dl). Though such disputes
are far from an every day occurrence, this intense concern with tombstone
position has a long history. A judge, presiding over an antitrust case against
a number of leading investment banks in 1951, commented that the pre-
occupation of banks with tombstone position was akin to the obsession of
Hollywood or Broadway stars with the position of their names in marquees
(Carosso, 1970).
The fact that banks will forego considerable short-term economic rewards
in order to defend their tombstone position is indicative or the significance
of tombstone position as an earmark of a collectively accepted status rank-
ing. To convert tombstone position to a measure of status, one of the stand-
ard relation measures for status is employed, Bonacich's (1987) c(a, 3)
measure. Formally, Bonacich's c(a, (3) measure is defined as follows:
(2)
where a is a scaling factor, ($ is a weighting factor, R is a relational matrix,,
and 1 is a column vector of ones, c is a vector of status scores, one score for
each bank in the population. Cell rtj specifies the extent to which /' occupies a
superordinate position to j . For the purposes of this analysis, r,j is the pro-
portion of tombstone advertisements in which bank / occupies a superordi-
nate position to bank/ Cell r,-, therefore ranges in value from 0 to I.2 Using
Bonacich's standardization, a status score of 1 is a 'normal' value that is nei-
ther high nor low. The lower bound on an actor's status is 0.
9. Data
Status of the Focal Bank
We measure the change in status between two time points, 1981 and 1987.
We choose a seven-year time period because previous work in this area
suggests that a bank's status is only likely to experience relatively minor
fluctuations over time periods of a few years (Hayes, 1971, 1978). The status
scores for 1981 and 1987 are derived from the tombstones for all non-
investment grade offerings displayed in The Wall Street Journal in those re-
spective years. In 1981, there were 180 non-investment grade tombstones that
2 Note chat cell r/Vis not necessarily equal to 1 minus r̂ . In feet, if banks i and /' ever appear in the
same bracket them, r̂ will generally not equal 1 minus r^
463
The Dynamics of Organizational Status
TABLE 1. Representative Status Scores
Bank 1981 Status 1981 status
rank
1987 status 1987 status
rank
Morgan Stanley
First Boston Corporation
Prudential Bache Securities
Goldman Sachs
Merrill Lynch
Salomon Brothers
Lehman Brothers
Bear Sterns
Paine Webber
KidderPeabody
E.F. Hutton
Wertheim Securities
L.F. Rothschild Securities
Dean Witter Reynolds
Shearson American Express
Smith Barney
Dillon Reed
Lazard Freres
Warburg Paribus Becker
Drexel Burnham Lambert
New Court Securities
Robinson Securities
Robertson Securities
Anderson Securities
3.99696
3.69273
3.03846
2.58810
2.51190
2.42793
2.31415
2.26895
2.26499
2.22815
2.19418
2.18137
2.18054
2.17666
2.17897
2.17789
2.17666
2.16955
2.16955
2.15789
1.19376
0.72837
0.21183
0.00177
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
25
50
101
150
2.26507
5.87647
0.13885
2.69464
2.61348
2.59099
3.04878*
3.18736
0.32452
0.28730
0.13375
0.12783
0.12281
0.11139
3.04878*
0.13945
0.11139
0.1126
N/A
0.34947
N/A
0.00904
0.10015
N/A
7
1
14
4
5
5
3
2
10
12
16
17
19
15
3
13
20
21
32
22
'Shearson and Lehmann merged between 1981 and 1987. Accoridngly, the two banks have the same status
score in 1987.
N/A denotes that this bank is no longer present in the 1987 tombstones.
appeared in The Wall Street Journal; in 1987, there were 132 non-investment
grade tombstones. By converting the information in the tombstones to two
relational matrices (one for each year) as described above, we can then use
the measure specified in (2) to produce status scores for the two years.3 Table 1
provides some representative status scores for those firms in the non-
investment grade market.
Average Status of the Focal Bank's Management Partners
A variable of central analytical interest is the average status of a bank's man-
agement partners between 1981 and 1986, inclusive. Data on manager-
3 Further details on the conversion of information in the tombstones to status scoresiare presented in
Podolny (1991,1993).
464
The Dynamics of Organizational Status
co-manager relations are obtained from data collected by the Securities Data
Corporation (SDC).4 The SDC is the leading information service firm col-
lecting data of interest to the investment banking community.
The average status of a bank's management partners are calculated over
the time period 1981 to 1986 by using the status scores of those partners in
1981 as a proxy for their status in subsequent years. Using the 1981 scores
may introduce some unwanted noise in the data, but it would have been
quite time consuming to collect status information for the intervening years
between 1981 and 1987, and we see no way in which this additional noise
biases the results in favor of our hypotheses.
Performance Measures
We include two measures of a bank's performance: the number of offering
on which a bank has been manager or co-manager between 1981 and 1986
and the total dollar volume of offerings for which a bank has been lead man-
ager or co-manager between 1981 and 1986. Both measures were computed
using SDC data. Number of deals managed and dollar volume of deals man-
aged are the standard performance measures reported at quarterly and annual
intervals in trade publications such as Institutional Investor and Investment
Dealer's Digest.
Selection Bias
The 1980s witnessed a large reduction in the average number of participants
in a typical underwriting syndicate. The reason for this decline in the num-
ber of participants is beyond the scope of this paper, but the consequence is
that the number of firms participating in non-investment grade syndicates
decreased dramatically over the period of the study. Of the 171 banks that
had participated at least minimally as members of non-investment grade
syndicates in 1981, only 68 were members of such syndicates in 1987.5 Due
to the large decline in the number of participants, it is important to control
for possible selection bias in estimating equation (1). We predict selection
based on the log of the number of offices that the bank operated in 1981.
Number of offices is a good proxy for the size of a bank's sales force, and the
size of a bank's sales force is an important determinant of a bank's ability to
underwrite security offerings. Data on number of offices for the largest 100
banks in any given year are published in Institutional Investor. We dummy
4 These data were graciously made available to the authors by Robert Eccles and Dwight Crane.
' Banks were categorized as being participants in the market if they participated in at least three non-
investment grade offerings.
465
The Dynamics of Organizational Status
TABLE 2. Likelihood of Inclusion of 1987 Population of Banks
Variables Estimate (S. error)
intercept 0.47 (0.60)
log (number of offices) 0.35 (0.21)*
missing information on number of offices -1.99 (0.65)*
N = 171, dii-square = 67.99 with 2df
*p < 0.05, one-tailed test
code all banks not listed among this 100, and using a logistic specification,
we estimate the odds that a bank in 1981 will not be included in the sample
in 1987. Results for the selection equation are presented in Table 2. We
then include the predicted probability of exclusion as a control variable in
the final analysis. One might suppose that a bank's own status, the status
of its management partners, and the number and dollar volume of deals
managed by the bank should be included as independent variables in the
selection equation since these variable could potentially influence whether or
not a bank remains in the market at the later time period.
However, the inclusion of these independent variables in the selection
equation results in an identification problem in the main equation. Any
variable that is included in both the selection equation and the main equation
is essentially entered into the main equation twice, once as a predictor of the
selection variable and once as an independent variable. The only reasons that
one can estimate the main equation when such variables are included in the
selection equation is that (i) the selection equation incorporates additional
variables (in this case, the number of offices) and (ii) the selection equation
and the main equation have different functional forms.
Even if we set this identification problem aside, the alternative specifica-
tion of the selection equation does not affect the results of the main equation
for status growth (see Table 4, column 4). Therefore, given the identification
problem and given that the inclusion of these additional variables does not
affect the results for the main growth equation, we rely on the selection
equation reported in Table 2.
10. Analysis
Table 3 presents descriptive statistics for the variables used in the analysis.
Table 4 presents the regression results. We begin by considering the base-
line equation in column 1 of Table 4, where the exogenous covariates are
excluded from the analysis. The coefficient for the intercept is negative. This
negative intercept in column 1 implies that the average status pf firms is
declining over time. It seems reasonable that the average status of firms
466
The Dynamics of Organizational Status
TABLE 3. Descriptive Statistics
Variables Mean (S. Deviation)
Focal bank's status, 1981
Average status of management
partners, 1981-1986
Number of offerings
mananged, 1981-1986
Underwriting volume
managed, 1981-1986
(in millions of dollars)
1.10(1.03)
1.91 (1.74)
37.57 (66.81)
4054.0(3265.0)
TABLE 4. Growth Rate Models for Status
Variables (1) (2) (3) (4)
Intercept
Average status of
management
partners, 1981-1986
Number of offerings
managed, 1981—1986
log (Underwriting
volume managed
1981-1986)
Exclusion probability
-7.30**
(0.90)
0.03
(0.41)
-12.23**
(1.18)
-0.57
(0.36)
2.38**
(0.44)
-16.82**
(2.90)
-0.91**
(0.38)
1.56"
(0.58)
0.025*
(0.015)
0.24*
(0.14)-17.74**
(2.88)
-0.82**
(0.38)
1.69**
(0.60)
0.026*
(0.015)
0.28*
(0.14)
-0.81
(0.91)
R2 0.00 0.31 0.36
= 68
0.38
Standard errors are in parentheses.
*p < 0.10, one-tailed test
**p< 0.05, one-tailed test
should decline between 1981 and 1987 since the number of firms in the
market decreases over this period. The fewer the firms in the market, the less
deference is generated across the population of firms, and accordingly, the
lower the average status of a given firm.
The point estimate for p, the endogenous feedback coefficient, is positive,
though the effect is not significantly different from 0. The fact that we cannot
rule out Gibrat's baseline hypothesis of proportionate growth is noteworthy.
To the extent that high-status and low-status firms experience identical
growth rates in status, the absolute status difference between high and low-
status firms increases over time, and this increase is unchecked by any endo-
genous bound. Such a result is consistent with Merton's Matthew Effect.
467
The Dynamics of Organizational Status
When the exogenous covariates are included n the model, the point esti-
mate for p declines dramatically from 0.03 to —0.82, which is significantly
less than 0. By substituting a value of —0.82 into equation (1), it can be
shown that this value for p leads to relatively rapid convergence toward
some fixed level of status.6 We interpret this result as signifying that the
bounds on a focal bank's growth in status are strictly determined by the sta-
tus of a bank's affiliates and the bank's past performance. Banks can only
sustain status growth to the extent that they are able to form affiliations and
generate performance outcomes that are consistent with a higher level of sta-
tus. If the average status of a bank's management partners and the bank's
performance do not increase, then growth in status is quickly checked.
Since we know from column 1 that the unconditional growth rates are
essentially independent of current status level, we conclude that during this
early period of market formation in the non-investment grade market,
higher-status banks find it no more difficult than lower-status banks to
achieve a given increment in either the average status of their exchange part-
ners or their performance outcomes. The consequence is that the absolute
difiference in status between higher and lower status banks increases over
time. However, given the results in columns 2 through 4, it should be clear
that the upper bound on this process is set by the size of the market and by
the inherent tension between expanding one's market share and entering
into exchange relations only with those who are highest status. We will
return to this point in the conclusion, but now turn to a more explicit con-
sideration of the exogenous coefficients themselves.
As predicted, the effects of the two performance measures and the average
status of the focal bank's management partners are positive and statistically
significant. Each additional deal on which the focal bank is a lead manager
or co-manager increases the status growth rate by exp(0.03) = 1.03 times.
Each additional one unit increment in the average status of the bank's man-
agement partners increases the status growth rate by exp(1.69) = 7.24
times. Therefore, as in non-market contests, the status of an actor's affiliates
significantly affect an actor's own status.
11. Discussion
This paper has provided some evidence that the status of an actor's exchange
partners has a positive impact on an actor's own status. We have focused on
manager-co-manager relations because it is possible to collect systematic
data on the status of banks. Of course, in the primary securities markets,
banks also enter into exchange relations with corporate issuers, and with
6 In substituting, it is important to remember that there is a 5-year interval between S, and S,+l.
468
The Dynamics of Organizational Status
investors. We obviously expect that such relations should impact on a bank's
status as well, and indeed there is some qualitative information that suggests
the transfer of status between banks and corporate issuers (Podolny, 1995),
but it is not possible to collect sufficiently systematic data on corporate and
investor status to pursue a similar investigation of these exchange relations.
Nevertheless, particularly when coupled with previous work that demon-
strates economic benefits of status, this paper has several implications for our
understanding of exchange and markets.
First, some answers are provided to a question that economic perspectives
on the market have tended to overlook: who exchanges with whom? The
neo-classical approach to markets tends to abstract from particular dyads;
the transaction-cost approach tends to take dyads as a given. By illustrating
the status-based externalities involved in any particular exchange, this paper
provides some guidance as to which exchange opportunities actors will
actively pursue and, even more interestingly, which exchange opportunities
they will seek to avoid. Even if an actor may derive some benefit from the
transfer of goods or services in a particular exchange, that actor may still
avoid the exchange if the consummation of the transaction would result in a
lowering of the actor's status.
Earlier research (Podolny, 1994) has revealed a strong tendency toward
status-based homophily in the non-investment grade market. That is, high-
status firms tend to manage with high-status firms and low-status firms tend
to manage with low-status firms. Such a tendency toward homophily is
obviously completely consistent with the finding in this paper that an
actor's status is affected by the status of the actor's affiliates. If all actors seek
to avoid affiliations with lower-status actors but still have reason to engage
in exchange relations, then there should be a tendency toward such
homophily. Such homophily, however, implies a restriction on market share.
The model and results give additional specificity to the trade-offs involved
between seeking to maximize the status of one's exchange partners and seek-
ing to add additional partners.
Second, this paper illustrates that the value that inheres in any particular
exchange is not separable from the larger social organization of the market.
Earlier we alluded to one reason why the value that inheres in a transaction
is not independent of third parties: a transfer of status only occurs when it
can be observed or verified by an actor outside of the dyad. However, there is
another reason. Since each actor's status is a function of the status of that
actor's exchange partners, whose status is a function of the status of their
exchange partners, and so on, a broad set of exchanges impacts on the value
that is ascribable to any particular transaction.
Given this coupling of any local exchange to the broader global context,
469
The Dynamics of Organizational Status
an interesting question for future research will be to consider the dynamics
of status from a more macro-level perspective. While the concept of a status
distribution implies a unidimensional ordering of firms, status distributions
can differ in a number of respects, such as variance or skewness. Accord-
ingly, a number of questions may be addressed. How does the status dis-
tribution evolve over time? How does the distribution of status affect the
amount of exchange in a market? Are there points in the status distribution
that represent significant mobility barriers, or is the rate of mobility rel-
atively constant across the status distribution? To answer such questions, it
will obviously be important to have data on the status distribution over a
longer time period than covered in this study. Yet by answering such ques-
tions, future research will provide even greater insight into the social struc-
tural context in which market exchange is situated.
Acknowledgements
An earlier version of this paper was presented at the Firms, Markets, and
Organizations conference at UC Berkeley'sHaas School of Management, 6-8
October 1995. The authors are indebted to Bill Barnett, Jim Baron, Jon
Bendor, Mike Hannan and Trond Petersen for helpful comments.
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