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This study directly examines the reputational penalties that managers pay when they engage in controversial governance practices that raise questions about managerial self-interest. These penalties should deter questionable behavior and enable reputation to serve a social control function, yet we know little about how and when these penalties are actually imposed. Unlike prior research in this vein, we account for the fact that reputational penalties associated with such practices may differ across audiences because of differences in interpretations of the practice and differences in causal attributions about its use. Specifically, we develop theory to explain how and when stock analysts and peer executives applied reputational penalties tomanagers when firms used a poison pill, a prominent anti-takeover device. We find that the reputational penalties associatedwith poison pills differed substantially between these two groups and that these groups applied different penalties depending on the media coverage that the poison pill received, the performance of the firm, and the extent to which the practice had already been adopted. The findings suggest that reputational penalties for questionable behaviors may be more contingent and harder to sustain than previously thought.
