Unpacking Organizational Agency in Institutional Change: The role of executives’ political connections and shareholders’ investment horizons

In studies where institutional changes are initiated outside of the organization, two key actors are identified: the institutional entrepreneur, who initiates the change, and the affected organization, which is impacted. This study highlights the crucial role of the affected organization’s agency in adopting new practices in response to normative institutional changes, shifting the focus beyond external initiators. We develop a novel theoretical framework that highlights the interplay between organizational agency and external institutional changes, demonstrating how strategic responses are shaped by both affected organizations and external pressures. Using the Pollution Information Transparency Index (PITI) project as a vehicle for normative institutional change, this study conducts a thorough analysis of its effect on firms’ new practices – environmental innovation – employing longitudinal data (2006–2018) covering 1,988 Chinese listed industrial firms. Our findings reveal that the outcome of normative changes in fostering the adoption of new practices significantly depends on the agency of the affected organizations, moderated by executives’ political connections and shareholders’ investment horizons. Specifically, firms led by executives with weaker political connections or supported by shareholders with long-term investment horizons are more likely to embrace these changes, while those with stronger political connections or a short-term focus tend to resist them. This research not only bridges a significant gap in the literature by highlighting the critical role of affected organizations’ agency but also expands the scope of analysis in institutional change, providing deeper insights into the complex relationship between organizational agency and institutional change.