Purpose When and why do organizations prefer high-status exchange partners? While past work has focused on status as a signal to the marketplace, this study shows that actors use the selected organization's status as a signal to legitimate their own selection decision. Design/methodology/approach The context of the study is the selection of investment banks by local governments in the United States for the purpose of selling municipal bonds to investors. Hypotheses were developed through interviews with participants in the public and private sectors and were then tested using generalized estimating equations (GEEs). The models include 6,720 selection decisions nested within 1,032 local governments. Findings Interview data reveal that governmental decision-makers struggle with interdepartmental conflict and are concerned about the perceived legitimacy of decisions in the "political arena". The quantitative results confirm that with respect to selection decisions, the social context of the local government matters. Specifically, racial/ethnic heterogeneity, political competition and functional complexity-contexts where actors must signal independence and objectivity in decision-making-are each associated with an increased likelihood of retaining a high-status investment bank. Originality/value The study shows that a preference for a high-status partner is not just market driven. Rather, it emerges also from the legitimacy demands of the organization's own participants. More broadly, the study reveals how organizational decision-making-even that pertaining to the external market environment-is embedded in an organization-specific social reality.
