Adaptation of New Organizations to Legitimacy Shocks: Postbellum Firearms Firms in the U.S. South, 1866-1914

Abstract

In the wake of exogenous institutional change, organizational populations often experience a legitimacy shock. As a new institutional logic becomes dominant, old symbols and practices are delegitimated and new ones legitimated. Old symbols and practices persist into the postshock period, however, forming an ecology of diverse cohorts and audience schemas, some divergent and others convergent with the new institutional logic. Because new organizations look to their rivals for knowledge of how to cope, I examine how the shifting alignment of a rival cohort to changing audience schemas influences a new organization's own alignment and, thus, mortality. I propose that density at founding of divergent preshock organizational cohorts early in the postshock period reduces a new organization's mortality due to an initial endowment effect and then becomes more mortality-increasing over time as maladaptive imprints take over. Density at founding of convergent postshock organizational cohorts has a U-shaped effect on mortality - similar to that caused by a legitimacy vacuum - but this effect emerges after a delay as legitimation processes begin to dominate delegitimation processes. Also, following Red Queen theory, I argue that competitive experience with divergent organizational cohorts increases mortality, but competitive experience with convergent organizational cohorts decreases mortality. To test these arguments, I use the institutional shock of the American Civil War - during which the firearms industry of the U.S. South underwent a period of government-led command-and-control centralization - as a natural experiment. The findings are consistent with the main arguments, though the overall postshock effect of density at founding appears to be dominated by early stage endowment effects, contrary to assumptions.