Inappropriateness Penalty, Desirability Premium: What Do More Certifications Actually Signal?

Abstract

Prevailing theory argues that more certifications increase performance. However, emerging empirical evidence implies that obtaining more certifications may actually decrease performance. How do we reconcile this tension? Practically speaking, why would ventures seek additional certifications in light of these recently identified risks? To address this gap between existing theory and recent empirics, we look more closely at ventures’ activities and performance outcomes after they receive their first certification. We posit that different patterns of certification reflect different forms of experimentation. In particular, ventures may be willing to experiment in ways that incur an inappropriateness penalty for the chance to gain a subsequent desirability premium if their experiments succeed. Inappropriateness means that certifications signal divergence from accepted market norms and standards. Desirability means that certifications signal activities that are in the perceived self-interest of the potential audience. We hypothesize that certifications reflecting broad experimentation incur initial inappropriateness penalties, yet when successful, they are more likely to lead to breakthroughs that generate desirability premia. We find support for this idea through an empirical analysis drawing from a sample of 7,440 U.S. ventures that receive one or more Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants to commercialize new technologies. This study advances institutional theory of certification to better account not only for its benefits but also for its costs.