The Social Facticity of Partner Status: The Case of Local Governments and Investment Banks

When and why do organizations prefer high-status exchange partners? When and why do organizations prefer low-status exchange partners? A theory of organizational status preferences should be able to answer both of these questions simultaneously. I argue that an organization’s status preferences with respect to partner selection should be viewed as a social process, rather than just a strategy to reduce exchange uncertainty, enhance market prestige or satisfy market institutions. Organizations are sites of social construction and negotiation. The partner selection process must cohere with the production of a legitimate, organization-specific social order. In heterogeneous organizations, legitimacy is established through the externalization of action; the selection of a high-status partner thus demonstrates coherence with the social order. In homogeneous organizations, legitimacy is tradition-based; the selection of a high-status partner will be viewed as disruptive to the social order. Thus status does not determine a firm’s market legitimacy. The characteristics of the evaluator determine the legitimacy of status. This is illustrated by an examination of the municipal bond issuance process, where local governments in the United States select investment banks in order to issue debt obligations. Specifically, I find that racially/ethnically, functionally and politically heterogeneous organizations have a preference for higher-status partners, while homogeneous organizations prefer lower-status partners. Thus, organizations interact with external actors through an internally negotiated lens. Partner status is a symbol relevant to the construction of an organization-specific social reality