Institutional Logics as a Resource and Risk: Logic Deviance and Categorical Penalties in US Community Banks

Abstract Can institutional logics be damaging for the same category of actors they are presumed to benefit? Can firms prevent or reduce this detrimental effect? This study integrates the institutional logics perspective with category research to examine these questions in the context of community banks. Community banks are locally embedded firms explicitly adhering to the community logic – a worldview that emphasizes the values of mutual trust and reciprocity. While previous research suggests that the community logic can benefit the financial performance of locally embedded firms, we propose that it can also impose risks, depending on the circumstances. Specifically, we predict that a stronger community logic not only benefits the financial performance of locally embedded firms, but also increases categorical penalties (i.e., delegitimation and stigma), damaging the financial performance of non‐culpable firms when other community firms commit wrongdoing. We also predict that firms can diminish categorical penalties through community investment. Examining the financial performance of the full sample of US community banks in 352 communities for the years 2006–2013, we find robust empirical support for these predictions.