Research SummaryOrganizational stigma has been commonly associated with a number of negative economic externalities in prior literature, but the mechanism by which this occurs and the extent of the associated consequences have received little attention. We address these gaps by theorizing that stigmatizing labels damage the legitimacy of the target by highlighting a deviation from the expectations of relevant audiences. We also argue that the content and focus of stigmatizing labels, as well as the features of the stigmatizer audience deploying them, will affect the magnitude of the negative economic consequences of stigma. Through an analysis linking the condemnation of arms producers in the media between 1998 and 2016 to cumulative abnormal returns (CAR) in the stock market, we find broad support for our arguments.Managerial SummaryThis paper examines the economic impact of stakeholder criticism on firms, using data from the global arms industry to develop a typology of criticism based on its content, focus, and origin. We find that criticism can negatively affect a firm's stock market returns, particularly when those criticizing have the authority to condemn specific behaviors. Civil society entities like nonprofits or the media, politicians, and economic players such as investors each have unique authority to criticize harmful behavior, illegal behavior, and unethical affiliations, respectively. Understanding the different types of criticism and their potential economic consequences can help firms better manage stakeholder relationships and mitigate negative impacts on their financial performance.

This study examines whether and when, in a stigmatized industry, firms’ negative publicity can lead to the appointment of their CEOs to the boards of directors of other firms within that sector. Building on research on ingroup identification and on stigma, we propose that within a stigmatized industry, when a firm receives negative publicity, its CEO is more likely to join the board of other firms in the industry, possibly because these other firms interpret the negative publicity as a sign of the social identification of the CEO with the stigmatized industry. We also suggest that this relationship is more likely when the negative publicity reveals information otherwise not available about the CEO. We test our hypotheses using a novel, hand-collected dataset of 408 CEOs in 205 firms in the global arms industry, between 1998 and 2017, and find that within this stigmatized industry, when a firm receives negative publicity, its CEO is more likely to join the board of other firms in the industry, and that lower levels of CEOs’ reputational capital and visibility magnify this effect. Our findings advance the conversations in stigma research about upper echelons, highlighting the importance of internal and external actors and of the type of stigma, when investigating the consequences of stigma for upper echelons’ careers.

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