UCL School of Management is delighted to welcome Andrew Shipilov, INSEAD, to host a research seminar discussing ‘The Liability of High Status and the Advantages of Fragility in
the Face of Environmental Shocks’
Status is a signal of quality in the environments characterized by “Spencian” uncertainty, i.e. the uncertainty about the quality of actors given the steady state of their industry. In such environments, associations with prominent industry participants increases the odds that its owner has high quality resources. However, when faced with “Knightian” uncertainty, i.e.situations where market participants cannot set accurate odds for predicting quality based on affiliations with prominent industry participants, status’ reliability as a quality signal goes down. These environments often occur following shocks to the industry that change the logic of competition. Environments characterized by Knightian uncertainty favor other kinds of network positions, for example, those characterized by “fragility”. Fragile firms depend on a small set of partners which in turn depend on a small set of partners of their own. As fragile firms are repeatedly penalized when their industry is in a steady state, they develop unique skills to extract value from collaborations with a limited number of partners. Exogenous shocks weaken most dominant firms in the industry, yet the shocks allow fragile firms to benefit from exploiting a handful of value creating collaborations. We examine how the dot-com crash of 2000 affected investment banks’ ability to convert status and fragility of their network positions to performance. We find that, following this shock, high-status banks lose performance advantage relative to low-status banks, while banks in fragile network positions gain performance advantage.