The Ability to Change or the Willingness to Change: Stakeholder Interpretation of Adversity

Firms often face adverse environmental events which have the potential to destroy the value the firm has created. This study focuses on the occurrence of adverse events. In particular, we address the research question of what organizational and managerial characteristics impact shareholder interpretation of the severity of the adverse event. Building on insights from the resource based and upper echelon theories, we propose that bundles of firm capabilities and top management team composition signal to shareholders the ability of the firm to handle the adverse event and to engage in strategic change. We test our model in the biotechnology industry, and operationalize an adverse event as a drug terminated during a clinical trial. Our results indicate the importance of the top management team on shareholder perception of event severity.