Abstract

Much research has examined the positive effects of legitimacy spillover. However, negative events may reduce the extent of legitimacy, which may in turn spillover to affect the legitimacy of important stakeholders including alliance partners. This study examines incidents of regulative legitimacy violation and focuses on the effect such incidents have on the alliance partners of the perpetrating organizations. We specifically examine three types of such violations—administrative law, criminal law, and civil law—to show that the loss of regulative legitimacy negatively influences the stock market performance of alliance partners. More interestingly, not all corrective actions and repair efforts are equally impactful. We show that the effect of repair efforts by the perpetrating firm on the alliance partner differ depending on the nature of those violating incidents.