Legitimacy Theory in Financial Decision-Making Contexts

In this paper, we examine legitimacy theory, a well-established framework within psychology and sociology, and introduce it to accounting academics through an exploration of its prior uses in other fields, its potential implications for investment decision-making, and a targeted experimental application. Legitimacy theory posits that individuals respond to a multilevel evaluation of the legitimacy of an entity or system. Based on their simultaneous appraisals of the overall societal benefit and the appropriateness of specific actions undertaken, individuals choose support or opposition. Applied to an investment setting, this framework provides insight into the multidimensional expectations of investors. In addition to covering the existing state of the theory, our study also extends it by exploring how a company's legitimacy (or lack thereof) may change over time, suggestive of a dynamic aspect of the framework. We conclude with suggestions for future applications of the theory.