Article

Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox

If you want to read the PDF, try requesting it from the authors.

Abstract

In this paper we argue that managers confront a paradox in selecting strategy. On the one hand, capital markets systematically discount uniqueness in the investment strategy choices of firms. Uniqueness in strategy heightens the cost of collecting and analyzing information to evaluate a firm’s future value. These greater costs in strategy evaluation discourage the collection and analysis of information regarding the firm, and result in a valuation discount. On the other hand, uniqueness in strategy is a necessary condition for creating economic rents and should, but for this information cost, be positively associated with firm value. We find empirical support for both propositions using a novel measure of investment strategy uniqueness in a firm panel dataset between 1985 and 2007.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... By employing a difference-in-differences (DiD) methodology which compares the changes in firm value of firms affected by a brokerage house merger or closure (treated firms) to firms that are unaffected by these events (control firms), we are able to estimate the causal long-term impact of coverage terminations on firm value. We measure a firm's value with several proxies such as Tobin's q 1 , excess value (Berger and Ofek, 1995;Hong and Kacperczyk, 2010), and two adjusted Tobin's q measures (Litov, Moreton, and Zenger, 2012). Our results provide causal evidence that a reduction in analyst coverage decreases firm value by -3.14% to -13.1% depending on the respective firm value measure. ...
... This implies that Tobin's q increases with the investors' estimates of the firm's fundamental performance, e.g., achieved by a good monitoring of the management. We follow prior literature (Berger and Ofek, 1995;Litov, Moreton, and Zenger, 2012;Hoechle, Schmid, Walter, and Yermack, 2012) and construct three additional firm value measures based on a relative valuation approach: an excess value measure and two industry-adjusted measures of Tobin's q. The relative valuation measures allow us to capture the additional premium a firm obtains relative to a peer group because of idiosyncratic firm characteristics such as an expected higher (lower) future performance. ...
... Following Litov, Moreton, and Zenger (2012), we additionally calculate two industry-adjusted measures of Tobin's q that -similarly to the excess value -capture an additional premium (or discount) a firm got assigned relative to benchmark firms. These two measures are calculated as the difference between a firm's actual Tobin's q and an imputed Tobin's q. ...
... In some cases, the discounts are sufficiently large such that high quality products are withheld from the market altogether-a problem of 'adverse selection' or a 'lemon's problem' (Akerlof, 1970). As discussed in the finance, entrepreneurship, and strategy literatures, similar logic has been applied in research on capital markets (Rajan, 2012;Sanders and Boivie, 2004;Myers and Maljuf, 1984;Litov, Moreton, and Zenger, 2012;Bruton, Chahine, and Filatotchev, 2009;Zenger, 2013). When strategies are difficult or costly to evaluate, managers have the potential to deliberately disguise or -perhaps due to overconfidence - (Wu and Knott, 2006) promote a lower quality strategy as higher quality. ...
... Hence, uniqueness is a necessary condition for value creation, but uniqueness also renders strategies unfamiliar to investors and other capital market participants, and elevates the costs to evaluate and assess (Rajan, 2012;Sanders and Boivie, 2004;Litov et al, 2012). Correspondingly, strategic complexity, i.e. strategies with multiple interacting elements or decisions (Rivkin, 2000), heightens causal ambiguity and hinders replication. ...
... However, strategies that are difficult for rivals to understand and imitate are similarly difficult for investors and capital market actors to understand and value. The elevated information burden imposed by valuable but unique or complex strategies may further lead to discounted prices in capital markets (Litov et al, 2012;Rajan, 2012;Sanders and Boivie, 2004;Myers and Maljuf, 1984;Bruton et al, 2009;Guo, Lev, and Zhou, 2004) or to the selection of strategies that are more familiar, but perhaps less valuable. Thus, much like the more frequently examined moral hazard problem, the problem of adverse selection in markets for strategy may give rise to managers deviating from value maximizing strategy choices. ...
Article
Full-text available
Research in corporate governance has predominantly focused on the moral hazard problem and governance mechanisms that mitigate it. In this paper, we instead focus on adverse selection as an alternative agency problem, emphasizing well-intentioned managers making strategic choices they believe will increase firm value, but facing difficulty informing capital market participants about the value of these choices. We suggest that more valuable strategies are more difficult for market participants to evaluate, and that pressures on managers to adopt easy-to-evaluate strategies can generate this adverse selection or ‘lemons’ problem. We argue that governance mechanisms designed to mitigate moral hazard operate differently here, in some cases exacerbating rather than solving the adverse selection problem. We further propose that firms with unique and complex strategies may migrate to private equity as a partial remedy.
... The impact of securities analysts on managerial behavior has attracted the attention of both practitioners and academics in recent decades (Levitt 1998; Davis and Useem 2002; Davis 2005; Benner 2007 Benner , 2010 Benner and Ranganathan 2012; Litov et al. 2012). Acting as information intermediaries in the stock market, securities analysts' buy/sell recommendations and earnings forecasts can influence investors' expectations of a firm's performance and consequently affect the trading and pricing of its stock (Womack 1996, Skinner and Sloan 2002) as well as its managers' compensation and job security (Puffer and Weintrop 1991, Farrell and Whidbee 2003, Wiersema and Zhang 2011). ...
... The evidence is consistent with the view that earnings pressure encourages myopic managerial behavior, which was speculated but not tested in prior research (e.g., Chevalier 1995a, b; Zhang and Gimeno 2010). In addition, the paper also bridges two previously separated streams of literature about the influences of securities analysts and corporate governance on managerial decisions and contributes to each (Litov et al. 2012; Benner 2007 Benner , 2010 Connelly et al. 2010). ...
... Much of the corporate governance literature has assumed that managers mainly face shareholders or board members. However, research has shown the significant influence that securities analysts may have on firms' stock prices and on managerial behavior (Zuckerman , 2000 Litov et al. 2012; Wiersema and Zhang 2011; Benner 2007 Benner , 2010; Benner and Ranganathan 2012; Zhang and Gimeno 2010). To the extent that securities analysts play an increasingly important role in the functioning of capital markets and governance in publicly traded companies, their role should be emphasized more in corporate governance research. ...
Article
Full-text available
Recent research has shown that managers in publicly traded companies facing earnings pressure-the pressure to meet or beat securities analysts' earnings forecasts-may make business decisions to improve short-term earnings. Analysts' forward-looking performance forecasts can serve as powerful motivation for managers, but may also encourage them to undertake short-term actions detrimental to future competitiveness and performance. To identify whether managerial reactions to earnings pressure suggest evidence of intertemporal trade-offs, we explored how companies respond to earnings pressure under different conditions of corporate governance that shape the temporal orientations of managers. Using data on competitive decisions made by U.S. airlines under quarterly earnings pressure, we examined the effect of earnings pressure on competitive behavior under different ownership structures (ownership by long-term dedicated investors versus transient investors) and CEO incentives (unvested incentives that are restricted or unexercisable in the short term, versus vested incentives). The results suggest that companies with more long-term-oriented investors and long-term-aligned CEOs with unvested incentives are less likely to soften competitive behavior in response to earnings pressure, relative to companies with transient investors and CEOs with vested, immediately exercisable stock-based incentives. Using a difference-in-differences (DiD) specification for stronger identification, we also found that firms respond to their rivals' earnings pressure shocks by increasing capacity and prices, particularly when those rivals do not have long-term-oriented investors and CEO incentives. The evidence is more aligned with the view that the pursuit of short-term earnings as a result of earnings pressure may be detrimental to long-term competitiveness.
... Compared to the process and the timeline of the deal, of equal importance is the ability of analysts and investors to interpret and evaluate the M&A (Zenger, 2013). Organisations which adopt 'unique' strategies have been shown to be penalised by negative market reactions (Feldman et al., 2014;Litov et al., 2012;Zenger, 2013). These negative market reactions may be explained by the existence of information asymmetry between managers of organisations and outside investors (Gilson, 2000). ...
... These negative market reactions may be explained by the existence of information asymmetry between managers of organisations and outside investors (Gilson, 2000). Specifically, investors' lack of understanding of the value of an acquirer's strategy (Feldman et al., 2014), narrow specialisations by analysts (Zuckerman, 2004), and numerous cognitive limitations attached to covering diversified firms or firms with unique strategies (Feldman et al., 2014;Litov et al., 2012) result in depressed share prices. ...
... Also, our understanding of strategic variation and deviation is limited to the products and product lines within the Compustat Segments database (which MergerMarket employs). As identified by Litov et al. (2012), if these industry codes aggregate various product lines, then understanding the full extent of how a given organisation's strategy varies in comparison to the industry norm or from its former strategy may not be captured fully. Future research can make use of these variables for determining more long-term associations with the diffusion of open strategy. ...
Article
Our study theorises and tests why organisations engage in more external transparency as an open strategy practice and the share-price related outcomes associated with these practices. Drawing from literature on information asymmetry, we suggest that organisations that depart from their existing strategy or deviate from industry norms are more likely to open up their strategy in order to escape negative evaluations by analysts and scrutiny by investors. We further investigate how the stock market responds to more openness in strategy. In a dataset comprising of a sample of 472 M&A deals and 886 associated corporate voluntary communications over a five-year period, we find that the likelihood of organisations engaging in open strategy practices that contribute to external transparency is associated with the degree to which an organisation's strategy differs from industry norms, but is not associated with how much it varies from its existing one. Regarding organisational outcomes of increased openness in strategy, we illustrate that increasing the transparency of M&A strategy to investors through voluntary communications can bring share-price related benefits. Our research contributes to literature on open strategy, information asymmetry, and managing M&A.
... The emphasis dimension captures the extent to which a firm's practice appears to be unique as compared to the commonly adopted practice, reflecting the efforts of an organization to differentiate their practice in specific fields (Ansari et al., 2010;Deephouse, 1999;Litov, Moreton, & Zenger, 2012;Yuan et al., 2007). Given the complexity of CSR in terms of both its multidimensional nature and variations in content or depth (Philippe & Durand, 2011), it is appropriate to describe firms' CSR practices along the scope and emphasis dimensions. ...
... It is a continuous measure calculated based on the percentage of firms' efforts devoted to each CSR issue field rather than on a binary variable measuring whether or not a practice was adopted. In essence, our concept and measure of emphasis differentiation is closer to that of strategic deviation (Deephouse, 1999) and uniqueness (Litov et al., 2012) used in some other studies. Previous studies have argued that when comparing CSR practices it is important to normalize the measures by industry such that a firm is compared with the other firms in its own industry (Aguilera et al., 2006). ...
... However, our data is limited in that it only contains the number of activities in each field but not specific information for each activity. This limitation is also observed in the previous studies we cite such as Litov et al. (2012) and Deephouse (1999), both of which do not directly measure uniqueness in specific strategic action but proxy it by looking at deviation of effort allocation from the norm in terms of sales and assets respectively. Future studies are encouraged to develop more-comprehensive measures that can fully appreciate the qualitative differences of specific activities in each CSR field. ...
... Informational uniqueness is then represented by the logarithm of the inverse of the number of peer firms identified through textual analysis. The measure is validated by showing that, as predicted, unique firms receive less information transfer during the earnings announcements of their closest peer firm and attract less analyst coverage (Litov et al. 2012). For robustness checks, I compute an alternative measure using similarities in business segment weights based on industry classification. ...
... Uniqueness, however, may also bring informational problems. One such problem is identified by Litov et al. (2012) showing that uniqueness in corporate strategy choice discourages analyst coverage, possibly due to higher cost in information gathering and analysis. Litov et al. (2012) further proposes the term "uniqueness paradox" to describe the tradeoff between value creation and information problem (in discouraging analyst coverage) manager faces in selecting corporate strategy. ...
... One such problem is identified by Litov et al. (2012) showing that uniqueness in corporate strategy choice discourages analyst coverage, possibly due to higher cost in information gathering and analysis. Litov et al. (2012) further proposes the term "uniqueness paradox" to describe the tradeoff between value creation and information problem (in discouraging analyst coverage) manager faces in selecting corporate strategy. However, it did not consider the role of corporate disclosure in potentially mitigating the information problem. ...
Article
This dissertation examines how the lack of comparable public peers (“informational uniqueness”) is related to a firm’s disclosure policy and information environment. Having less information spillover from other public firms may present an information deficiency if it is not compensated by other components of the information environment. Using textual similarity in business description among firms to measure the extent of peer presence, I find that informational uniqueness is associated with a higher propensity by firms to provide ongoing bundled guidance. This is consistent with firms attempting to mitigate the information deficiency through strengthening their tacit commitment to continued disclosure by providing more information regularly on predictable schedules. Overall, I find a strong negative relationship between informational uniqueness and the quality of corporate information environment only among firms without regular bundled guidance. My results suggest that, while informational uniqueness can generate significant information deficiency, firms with strong tacit commitment to ongoing disclosure are largely able to compensate for the lack of information spillover from peers. On the flip side, firms surrounded by many peers may be subject to the influence of peer dynamics on their disclosure behavior. While the presence of comparable public peers likely expands investors’ information endowment on the base firm through information spillover on related exposures, discretionary disclosures by peer firms may also signal information arrival. This can raise investors’ inferred probability that non-disclosure is due to strategic information withholding rather than the absence of new information. In relation to this, I show that the bid-ask spread of the base firm slightly increases when its closest peer initiates discretionary disclosures, but subsequently decreases upon disclosure by the base firm. In addition, I find that the number of comparable public peers is strongly positively associated with the frequency of discretionary disclosure. Overall, these results suggest that the presence of peer dynamics can induce firms with more peers to provide discretionary disclosures more frequently.
... Management scholars have shifted the conversation related to securities analysts in three important ways. First, management scholars have focused on analysts' relationships to critical strategic firm behaviors that are controlled by managers and significantly influence overall firm value, such as corporate social performance (Luo et al., 2015), the horizon of competitive managerial decisions (Zhang & Gimeno, 2010), the convergence of business portfolio decisions (Feldman et al., 2014;Litov et al., 2012;Nicolai, Schulz, & Thomas, 2010;Zuckerman, 2000) and the tendency to invest in innovation (Benner, 2010;Benner & Ranganathan, 2012;Gentry & Shen, 2013). Strategic management scholars have also highlighted the role analysts play in validating and shaping a firm's internal organization, including top management personnel decisions (Gomulya & Boeker, 2014;Puffer & Weintrop, 1991;Wiersema & Zhang, 2011) and ...
... Mimetic forces have reinforced this institutional treatment of analysts through routines and infrastructure geared at perpetuating the manager-analyst relationship (Rao & Sivakumar, 1999). This institutional perspective of analysts explains why managers make substantial strategic decisions that do not necessarily contribute to shareholder value and are more consistent with industry-aligned analyst interests than diversified owner interests, such as divestment (Zuckerman, 2000), highly focused strategies (Nicolai et al., 2010), competitively undifferentiated strategies (Litov et al., 2012), delayed adoption of innovative technologies (Benner, 2010), and share repurchase (Benner & Ranganathan, 2012;Sanders & Carpenter, 2003). ...
... Similarly, Benner (2010) found analysts discourage adoption of technologies that are considered radically new to the industry because analysts are unsure how to value adopters. Ultimately, managers that do undertake unique strategies are penalized by analysts who have to incur additional information costs to learn about the unique strategy (Litov et al., 2012), while managers that focus on the core business are rewarded with higher valuations (Nicolai et al., 2010). Thus, managers could bond with analysts through industry-aligned strategic actions, which future research could explore. ...
Article
The current management literature recognizes securities analysts as institutional monitors influencing managerial decision-making, but this research takes a deeper look at the interdependence between manager and analyst self-interests to reveal exchange behavior at the manager-analyst interface. Integrating agency theoretic arguments of self-interest and bonding with game theoretic principles of reciprocity and assurances, I examine how manager and analyst self interests shape managerial behavior. Drawing on a sample from the insurance industry from 2001-2012 I isolate a discrete managerial self-interested behavior by observing risk aversion in claim reserve levels. I find managers increase their self-interested behavior when analysts issue optimistic forecasts, but optimism has diminishing returns as managers perceive overly optimistic forecasts as challenging performance targets. Strong performance minimizes investor scrutiny, which strengthens the relationship between forecast optimism and managerial self-interested behavior. I further advance a model that incorporates analyst interest in obtaining internal access to firm operations and managers. When accessible managers coordinate with optimistic analysts managers are assured that overly optimistic forecasts will not constrain their self-interested behavior. However, contrary to expectations, managerial accessibility weakens the relationship between forecast optimism and managerial self-interested behavior, suggesting managers maximize their self-interested behavior when they restrict their accessibility.
... It might be much more effective for a firm's managers to discuss the firm's own corporate-level value drivers (cf. Campbell et al., 2011Campbell et al., , 2012Kunisch et al., 2014). This leads to the third problem. ...
... Indeed, the (corporate) strategy literature largely agrees that sustainable advantages stem from performing unique activities e either activities that are different from those performed by other firms or the same activities performed differently (e.g. Litov et al., 2012;Porter, 1996). If each CHQ's activities are unique, how can we compare them with others? ...
... For examples, Campbell (1999) cautions that too many companies benchmark their "corporate planning" processes and, in so doing, prevent managers from focusing on what is unique to their companies' situations. In a similar vein, Kunisch et al. (2014) reveal that heads of mature corporate functions often benchmark their functions against peers and, consequently, tend to lose focus on their internal clients. ...
... Analysts also tend to respond more favorably when information is easier for them to gather (e.g., Jensen, 2006;Washburn & Bromiley, 2014), evaluate (e.g., Plumlee, 2003), and process (e.g., Benner & Zenger, 2016;Hirshleifer & Teoh, 2003). Moreover, analysts value their time highly and consider it an opportunity cost when a particular firm or firm activity demands additional time and attention (Hirshleifer & Teoh, 2003;Litov, Moreton, & Zenger, 2012;Lou, 2014). Analysts have limited time they can spend evaluating any specific activity before they need to move on to other tasks (Hirshleifer & Teoh, 2003), so they tend to respond negatively when a specific activity is unique, complex, or requires more time than normal to fully understand (Benner & Zenger, 2016;Litov et al., 2012). ...
... Moreover, analysts value their time highly and consider it an opportunity cost when a particular firm or firm activity demands additional time and attention (Hirshleifer & Teoh, 2003;Litov, Moreton, & Zenger, 2012;Lou, 2014). Analysts have limited time they can spend evaluating any specific activity before they need to move on to other tasks (Hirshleifer & Teoh, 2003), so they tend to respond negatively when a specific activity is unique, complex, or requires more time than normal to fully understand (Benner & Zenger, 2016;Litov et al., 2012). Scholars have even suggested this deters managers from pursuing strategies that may be difficult for analysts to process (Benner & Zenger, 2016;Litov et al., 2012). ...
... Analysts have limited time they can spend evaluating any specific activity before they need to move on to other tasks (Hirshleifer & Teoh, 2003), so they tend to respond negatively when a specific activity is unique, complex, or requires more time than normal to fully understand (Benner & Zenger, 2016;Litov et al., 2012). Scholars have even suggested this deters managers from pursuing strategies that may be difficult for analysts to process (Benner & Zenger, 2016;Litov et al., 2012). By foreshadowing, managers provide information to security analysts that can help decrease the amount of time analysts have to spend trying to gather data to predict and evaluate the firm's strategies. ...
Article
Managers can disclose information to security analysts as a form of impression management, but doing so is problematic because competitors can use that same information at the expense of the firm. We identify an impression management technique we call foreshadowing, which refers to hinting about future potential strategic activity. Foreshadowing provides information of value to analysts that can influence their evaluations of a firm, but not so much information as to put the firm at a competitive disadvantage. We hypothesize and find that managers who foreshadow acquisition announcements receive fewer analyst downgrades following the announcements, especially when there is more analyst uncertainty about the firm. We also hypothesize and find that analysts’ responses to foreshadowing positively influence the likelihood that managers eventually acquire other firms. Security analysts are often suspicious when firms announce acquisitions, as those announcements are cumbersome to analyze on short notice and raise questions about managerial motivations that might not represent the best interests of the firm. We find that managers can improve analyst reactions to acquisition announcements by disclosing some information of value to analysts—specifically by hinting that an acquisition could occur in the future. We refer to such hints as foreshadowing. Foreshadowing entails giving analysts information to reduce their suspicions and facilitate their analyses, but not so much information as to degrade the firm's competitive information advantage over other firms. Foreshadowing also allows managers the option to reconsider actually executing the acquisition if analysts respond negatively to its possibility.
... Table 1 shows that firms in the large deviation group are less profitable (ROA) than the small deviation group in our sample. However, the large deviation group has higher market-to-book ratios (MB), suggesting that strategic uniqueness may enhance growth potential Litov, Moreton, and Zenger (2012). ...
... In addition, firms in the large deviation group exhibit more volatile earnings (VROA) and higher beta (BETA) than the small deviation group; this is consistent with the evidence that strategic deviation often leads to extreme financial performance: either big wins or big losses (Tang et al., 2011). Furthermore, the two groups are different in analyst forecast properties, consistent with Litov et al. (2012) that strategic uniqueness affects analysts' earnings forecasts. Table 2 presents the correlation matrix for the main variables. ...
... To assess the robustness of our results, we follow Litov et al. (2012) and Bushman, Chen, Engel, and Smith (2004) to construct alternative proxies for strategy/business uniqueness. We follow Litov et al. (2012) and calculate strategic uniqueness (SUNIQUE) as the dot product of the difference between a focal firm's vector of sales (i.e., sales distribution across its segments) and the industry centroid vector. ...
Article
We examine the effect of strategic deviation on the relative amount of firm-specific information incorporated into stock prices, measured by stock return synchronicity. Strategic deviation is conceptualized as the extent to which the pattern of a firm’s resource allocation deviates from that of its industry peers. We find that strategic deviation is negatively associated with stock return synchronicity. Using a path analysis, we document that firms following deviant strategy issue more frequent managerial forecasts and have a higher level of block ownership than nondeviant firms, and that both managerial forecasts and block ownership partially mediate the relationship between strategic deviation and stock return synchronicity. Our study contributes to accounting and finance literature by documenting the role of firms’ strategic positioning in the stock price-formation process.
... Diseconomies of scope can arise from the need to coordinate across multiple, diverse divisions within the same firm (Gulati & Singh, 1998;Rawley, 2010;Zhou, 2011), and both agency problems and winner-picking may result when managers prioritize the interests of some divisions over others (Gartenberg, 2014;Pierce, 2012;Schoar, 2002). Division managers and other employees within multi-business firms may engage in costly influence activities in order to attain privileged positions vis-à-vis their peers (Milgrom & Roberts, 1988, 1990Scharfstein & Stein, 2000), and companies may experience information asymmetries when external constituents do not fully understand the logic of their diversification strategies (Litov et al., 2012;Zuckerman, 1999). ...
... For example, firms divest to reduce over-diversification (Markides, 1992(Markides, , 1995Porter, 1987), implying that the marginal cost of their diversification level (e.g., weak fundamentals or undervaluation in the stock market [Berger & Ofek, 1995Lang & Servaes, 1996]) has come to outweigh its marginal benefit (e.g., the ability to centralize functions or cross-subsidize businesses [Goold et al., 1994;Stein, 1997]). Relatedly, firms divest to clarify external perceptions (Bergh et al., 2008;Feldman, 2016a;Zuckerman, 2000), suggesting that the marginal cost of their strategic complexity (e.g., the inability of external stakeholders to evaluate their portfolio [Litov et al., 2012;Zuckerman, 1999]) has come to outweigh its marginal benefit (e.g., the rarity and inimitability of their strategy [Benner & Zenger, 2016;Litov et al., 2012]). Finally, firms divest as part of reconfiguration efforts (Capron et al., 2001;Karim & Capron, 2016), implying that the marginal cost of retaining a particular strategic asset (e.g., underperformance or failures of strategic logic [Hayward & Shimizu, 2006;Kaplan & Weisbach, 1992;Shimizu, 2007]) has come to exceed its marginal benefit (e.g., complementarity with existing resources [Capron, Dussauge, & Mitchell, 1998;Karim & Mitchell, 2000]). ...
... For example, firms divest to reduce over-diversification (Markides, 1992(Markides, , 1995Porter, 1987), implying that the marginal cost of their diversification level (e.g., weak fundamentals or undervaluation in the stock market [Berger & Ofek, 1995Lang & Servaes, 1996]) has come to outweigh its marginal benefit (e.g., the ability to centralize functions or cross-subsidize businesses [Goold et al., 1994;Stein, 1997]). Relatedly, firms divest to clarify external perceptions (Bergh et al., 2008;Feldman, 2016a;Zuckerman, 2000), suggesting that the marginal cost of their strategic complexity (e.g., the inability of external stakeholders to evaluate their portfolio [Litov et al., 2012;Zuckerman, 1999]) has come to outweigh its marginal benefit (e.g., the rarity and inimitability of their strategy [Benner & Zenger, 2016;Litov et al., 2012]). Finally, firms divest as part of reconfiguration efforts (Capron et al., 2001;Karim & Capron, 2016), implying that the marginal cost of retaining a particular strategic asset (e.g., underperformance or failures of strategic logic [Hayward & Shimizu, 2006;Kaplan & Weisbach, 1992;Shimizu, 2007]) has come to exceed its marginal benefit (e.g., complementarity with existing resources [Capron, Dussauge, & Mitchell, 1998;Karim & Mitchell, 2000]). ...
Article
Full-text available
Research Summary This paper analyzes how pay inequality influences divestiture decisions. Using detailed data on division manager compensation and divestiture activity, this study documents that firms are more likely to divest divisions when pay inequality among division managers is higher. To address potential bias in the measurement of pay inequality, we construct a “synthetic” measure that varies with regional and industry pay shocks that differentially affect division managers within firms. Post hoc analyses reveal that social comparison appears to explain, at least partially, the relationship between unequal pay and divestiture. These findings support the notion that pay inequality can be an important predictor of firm boundaries. More generally, they suggest that unequal pay may have significant strategic consequences as firms increasingly adopt performance‐based compensation to motivate employees. Managerial summary This paper analyzes the link between the degree of inequality in division manager compensation and the likelihood that companies divest businesses. We find that companies are more likely to divest when the pay of their division managers is more widely dispersed. Supplementary analyses show that this relationship is stronger when division managers are more likely to compare their pay to that of their peers, for example, within companies whose divisions operate in more closely related industries or in more proximate geographic regions. These findings show that pay inequality can predict when companies choose to exit businesses. As such, it is relevant for understanding how corporate strategy is influenced by performance‐based compensation policies, particularly as these policies become the norm in companies around the world.
... Research suggests, for example, that analysts have difficulty understanding the value of diversification (Feldman et al, 2014), valuable but "unique" strategies (Litov, Moreton, and Zenger, 2012), or firms' businesses or activities that are not easily classified in the industry categories that organize analysts' coverage of stocks (Zuckerman, 1999). Research also shows that analysts are relatively slow to recognize and understand major technological changes (Benner, 2010;Benner and Ranganathan, 2017), and that their influence is sometimes due to the increase in status given by the addition of a new industry category (Bowers and Prato 2017). ...
... Indeed, a core belief in a large body of work across management, accounting, and finance is that analysts are effective intermediaries in public equity markets (Womack, 1996;Li and You, 2015), reducing information asymmetries between investors and managers. Research further shows that firms that receive analyst coverage have higher stock prices, on average, indicating that analyst coverage, and the associated increase in visibility or reduction in information asymmetries lowers firms' costs of capital (Li and You, 2015;Litov, Moreton and Zenger, 2012;Zuckerman, 1999). ...
... The organizational literature on equity analysts presents a debate over the effectiveness and usefulness of these intermediaries (Feldman et al, 2014;Litov, Moreton, and Zenger, 2012;Zuckerman, 1999;Benner, 2010;Benner and Ranganathan, 2017;Beunza and Garud, 2007). Our study seeks to reconcile the competing evidence by explaining how these different views of analysts can accurately depict analysts' effectiveness or ineffectiveness in their roles as intermediaries. ...
... For instance, Villalonga (2004b) finds that the diversification discount is contingent on how firms' operations are broken down into segments. Moreover, various studies have established that diversified firms that undertake unrelated diversification or 'unique' corporate strategies are difficult for investors to understand (Bergh, Johnson, and Dewitt, 2008;Litov, Moreton, and Zenger, 2012). ...
... Moreover, analysts specialize by industry, but diversified firms operate in multiple industries, resulting in a mismatch between these companies' operations and analysts' expertise (Zuckerman, 1999(Zuckerman, , 2000Gilson et al., 2001). Finally, diversification causes firms to depart from their 'traditional' strategies, and analysts are often unable or unwilling to devote effort to understanding these new endeavors (Benner, 2010;Benner and Ranganathan, 2012;Litov et al., 2012). ...
Article
Full-text available
This article investigates how securities analysts help investors understand the value of diversification. By studying the research that analysts produce about companies that have announced corporate spin-offs, we gain unique insights into how analysts portray diversified firms to the investment community. We find that while analysts' research about these companies is associated with improved forecast accuracy, the value of their research about the spun-off subsidiaries is more limited. For both diversified firms and their spun-off subsidiaries, analysts' research is more valuable when information asymmetry between the management of these entities and investors is higher. These findings contribute to the corporate strategy literature by shedding light on the roots of the diversification discount and by showing how analysts' research enables investors to overcome asymmetric information. Copyright © 2013 John Wiley & Sons, Ltd.
... In support of this notion, Zuckerman (1999) finds that coverage mismatch increases the firms' likelihood to reduce its strategic scope. That analyst coverage mismatch is a concern is further substantiated by Litov, Moreton, and Zenger (2012). The authors argue that in assessing a firm's earnings prospects, analysts need to expend more effort on firms that have diversified portfolios. ...
... This study, along with Zenger (2013), argues that firms that follow a unique strategy are penalized by analysts since they do not neatly fit within a single industry. But while the research provides clear evidence that analysts are responsible for the discount that diversified firms experience, Zenger (2013) and Litov et al. (2012) also find that firms with more unique strategies (e.g., ones that have multiple businesses) have higher performance when measured using Tobin's q. ...
Article
As visible and knowledgeable experts who constantly collect, analyze, and disseminate information about the future prospects of publicly listed firms, financial analysts fulfill an important information brokerage and monitoring function for investors. By providing investment advice, financial analysts also influence the demand for a firm’s stock and thus its price. Executives pay close attention to financial analysts’ earnings forecasts and recommendations, so much so that they are frequently criticized for excessive focus on their forecasts at the expense of the long-term interests of the firm. But while research on analysts in strategic management is steadily growing, we lack a coherent understanding of the extent and nature of analysts’ diverse influences on executives’ and investors’ decision making and the context in which analysts operate. This is largely due to the fragmentation of the literature and the absence of prior reviews or meta-analyses of the topic. By organizing, synthesizing, and analyzing extant research efforts on analysts in the various domains of strategic management research, we aim to advance our knowledge on the influence of analysts on firms and investors. Further, we hope that our analyses and recommendations help further increase research coverage on this important organizational stakeholder.
... A major consequence of the path-dependent development of organizational routines is that the oldest routines will be the most tacit, and hence, the most likely to be taken for granted by managers (March and Simon 1958, Nelson and Winter 1982, Leonard-Barton 1992). Worse still, the very interdependencies emanating from a firm's legacy business may be particularly difficult for external constituents to assess, contributing to the undervaluation of that company in the stock market (Lang and Stulz 1994, Berger and Ofek 1995, Litov et al. 2012). Thus, managers might actually view their firm's legacy business as problematic rather than valuable. ...
... Organization Science 25(3), pp. 815–832, © 2014 INFORMS 817 amount of managerial time and attention (Harrigan 1980, Anand and Singh 1997) while simultaneously exerting a drag on these firms' stock market valuations (Lang and Stulz 1994; Berger and Ofek 1995; Zuckerman 1999; Villalonga 2004a, b; Litov et al. 2012 ). Interlake, originally a steel company that diversified into the aerospace and automotive industries, provides a good example of both of these problems: " For the last three years we've been trying to focus on our businesses that are technology-driven, " said Frederick C. Langenberg, chairman and CEO. ...
Article
Full-text available
This paper investigates "legacy divestitures," the sale or spinoff of a company's original, or "legacy," business. The central tension considered in this work is that the historical presence of a firm's legacy business should simultaneously make that unit very interdependent with the company's remaining operations and make the firm's managers highly likely to take those same interdependencies for granted. Consistent with these predictions, the post-divestiture operating performance of firms that divest their legacy businesses falls short of that of firms that retain comparable legacy units, especially when the divested unit operates in the same industry as others of the divesting firm's businesses. Newer chief executive officers (CEOs) are more likely to undertake legacy divestitures than their longer-tenured peers, and the most recently appointed CEOs undertake the most costly legacy divestitures. In summary, this paper provides insights into how historical interdependencies create value in diversified firms, as well as the decision-making processes that managers follow in overseeing these companies.
... Taip pat šiai pozicijai pritaria ir Rumelt (1993), kuris rašo, jog kiekviena verslo strategija yra unikali. Litov et al. (2012) pabrėžia, kad kapitalo rinkos sistemingai nuolaidžiauja unikalumui pasirenkant įmonės investavimo strategiją; strategijos unikalumas padidina informacijos rinkimo ir analizavimo išlaidas , siekiant įvertinti būsimąją įmonės vertę. Kita vertus, unikalumas strategijai yra būtina sąlyga sukurti ekonominę nišą (šiam reikalui informacija kainuoja), jis turėtų būti teigiamai susijęs su įmonės verte (Litov et al. 2012). ...
... Litov et al. (2012) pabrėžia, kad kapitalo rinkos sistemingai nuolaidžiauja unikalumui pasirenkant įmonės investavimo strategiją; strategijos unikalumas padidina informacijos rinkimo ir analizavimo išlaidas , siekiant įvertinti būsimąją įmonės vertę. Kita vertus, unikalumas strategijai yra būtina sąlyga sukurti ekonominę nišą (šiam reikalui informacija kainuoja), jis turėtų būti teigiamai susijęs su įmonės verte (Litov et al. 2012). Zan (1990) teigia, kad, žvelgiant iš pagrindžiamojo sampratos analizės lauko, strategija yra unikalus įmonės koncepcijos vienetas, kuris yra vienas iš svarbiausių indėlių teoriniams strategijos tyrimams. ...
Article
The modern business is developing in the context of rapid social and political changes, which contributes to the changes in economic and cultural priorities as well as mindset and behaviour of people. This puts new requirements on development and implementation of business negotiation strategies, aiming to ensure that during bargaining, everything is done to understand the other party and related contexts, to achieve mutual understanding, to reach common agreement and eventually find the optimal negotiating decision. The author of this article researched and analysed negotiation process concepts in the global scientific literature and practice. The article examines negotiation and bargaining concepts. Also, the global analysis of the scientific literature revealed that there is no single negotiation planning concept. The author defines the basic conceptual negotiation planning concepts. The paper deals with negotiation strategy conceptions used by scientists around the world. Conclusions present the proposals for further business negotiation research.Article in Lithuanian
... Further, the low participation of women on boards reduces and may eliminate precedents on which to evaluate the likely outcome of their presence. This increases the perceived risk associated with their nominations, which are therefore discounted by risk-averse investors (Lubomir, Moreton, and Zenger, 2012). As noted, female directors Women on Boards 469 in emerging markets are scarcer than in developed countries (GMI, 2013), and this scarcity accentuates the risk associated with their nominations. ...
... There are several reasons for anticipating that the impact of female directors on accounting and market performances will be weaker in governmentand family-owned firms. For one, risk-averse and conformist family-and government-owned firms are less likely to nominate women because such nominations represent a deviation from societal norms and are high-risk moves (Lubomir et al., 2012). The reluctance to nominate women deprives family-and government-owned firms from the potential economic benefits of female directors (outlined in Hypothesis 1). ...
... Do differences in cost and imitation differ from domestic systems in the way they promote rent appropriation (Larsen et al., 2019;Lippman & Rumelt, 1982;Powell et al., 2006)? Future research might also examine international dimensions of a uniqueness paradox, wherein complexity can forestall imitation and be a source of competitive advantage, but can also present downsides such as elevated financing costs due to information asymmetries with capital markets (Litov et al., 2012). ...
Article
Full-text available
This open access article argues that a robust academic field must set and revisit boundary conditions that define where, when, and to whom its insights apply. This is particularly true for a field such as global strategy where the ubiquity of the key terms invites indiscriminate use of the phrase. This essay argues that it is useful to define the field of global strategy as the subset of questions that meet the criteria for both “global” and “strategic” decisions. We offer an a priori approach to identifying and formulating problems that are unique to the global strategy field, suggest how our approach may help scholars better understand the “strategicness” of global decisions, and ultimately, offer a way for individuals with varied disciplinary or topical interests to connect with the field's core. It has been observed that few executives can clearly articulate their firm's global strategy. This observation is disappointing given the development of theoretical insights from the fields of international business and strategic management that suggest alternative ways in which organizations can reliably and repeatedly create, capture, and deliver value. The existence of this shortcoming suggests that it will be beneficial to develop unambiguous statements that define what constitutes a global, a strategic, and a globally strategic decision. This essay offers a priori definitions of these terms in the hope of helping individuals both consider the unique and distinctive elements of global strategy and better understand the core decisions that guide an organization's pursuit of its global objectives, scope, and sources of advantage.
... In untabulated regressions we have also investigated the impact of clawback adoptions on a firm's uniqueness. This variable presents the singularity of actions (measured by the sales in different segments) in comparison to its closest peer (Litov, Moreton, & Zenger, 2012). Both the main firm-fixed effects regression and the difference-in-difference design reveal a reduction of a firm's uniqueness after the adoption of clawback provisions. ...
Article
In the recent decade, many firms have adopted clawback policies to prevent managerial misconduct. Clawback policies allow the board of directors to recoup incentive compensation in predefined trigger events (e.g., financial restatements). Prior literature mainly highlights that clawbacks are able to fulfill their promise and, for example, reduce the likelihood of financial misconduct. In contrast to these functional outcomes, we provide empirical evidence that clawbacks have adverse effects on a firm’s strategic decision making. Using hand-collected data on clawbacks for a panel of S&P 500 firms between 2004 and 2014, we find a reduction in a firm’s strategic repertoire after the implementation of clawbacks. Such clawback induced reductions seem to be unintended and are especially detrimental for firms in competitive markets. Our findings are valuable for boards as well as for institutions deliberating about voluntary and mandatory clawbacks.
... And psychology research offers a number of potential nudges that might accomplish this, including reasoning by analogy, the power of serendipity and play, brainstorming, the introduction of novel primes, and so forth. Intriguingly, external evaluators (such as analysts and investors) of course also have biases that may affect how they evaluate, categorize and assess the strategies of companies (Litov et al., 2012), and nudges might also be designed by organizations to ensure more informed decision making by these external stakeholders. ...
Article
In this paper I discuss the role of manager as choice architect. The notion of nudging and choice architecture has received significant interest in law, economics and public policy. But the behavioral insights from this literature also have important implications for managers, HR professionals and organizations. In essence, employees are consumers of choice and are constantly confronted with a large array and interface of options, and this interface can be designed so as to maximize individual welfare and organizational outcomes. I first discuss the theoretical foundations of the nudge idea and then highlight how managers can design effective choice architectures for the management of human capital. By way of illustration, I specifically focus on four practical areas: 1) nudge hiring, 2) nudge training and development, 3) nudge human capital and organization, and 4) nudge strategy and innovation. Throughout the paper I also point out comparative differences in decision making between contexts (e.g., consumer choice versus decision making in organizations), including implied debates, and also highlight novel opportunities for future research in management and strategy. I particularly focus on the possibilities associated with nudges and choice architectures at the nexus of organizations, crowds and aggregate decision making. Key words: nudge, decision making, human capital and resources, management
... Other researchers have shown similar challenges in instances of major technological changes in the industries analysts cover or when firms pursue strategies that are potentially valuable but unique compared with their peers (Litov, Moreton, and Zenger, 2012). In essence, a growing body of research has begun to consider the direct influences of analysts on the firms they cover, opening the door to understanding how analysts' communications and ratings influence not only investors' decisions but also the strategic directions and actions of U.S. firms. ...
... Traditional explanations of pricing have focused on economic rationales. Prior literature on the social construction of markets highlighted the roles of legitimacy (e.g., Zuckerman, 1999; Litov, Moreton, and Zenger, 2012) and embeddedness (Uzzi and Lancaster, 2004). Our paper adds to but is also uniquely different from these contributions. ...
Article
Full-text available
Contrary to the general view that markets are shaped by economic forces, bargaining power, and the prior relationships between exchange partners, this paper posits that markets can sometimes also be purely socially constructed, in the sense that prices can vary irrespective of the economic value embedded in the exchange. Building on insights from the literature on categories, we argue that sellers may react to violations of local norms on the part of particular buyers by charging them higher prices. Sellers thus provide economic benefits, in the form of lower prices, to buyers who closely adhere to the category's norms. We test these ideas using data on the market for Champagne grapes, examining the exchange between grape growers (the sellers) and the 66 houses that make the sparkling wine (the buyers). Interviews and survey data informed us that growers have clear, normative ideas about what a Champagne house should look like and do: houses that are no longer headed by a descendant of the founder, are not located in one of the traditional Champagne villages, are relative newcomers to the industry, are part of a corporate group, supply supermarket brands, operate winemaking subsidiaries abroad, or acquire their own vineyards are all viewed in a negative light. Our models provide strong support for our prediction, showing that the prices different organizations are charged for their purchases depend substantially on whether they meet local expectations for who they are and what they do. Our qualitative evidence confirms that this differential pricing by growers occurs not through collusion but through a spontaneous, bottom-up process.
... In terms of initiations of coverage, analysts are rewarded for maximizing the accuracy of the forecasts they produce (Bhushan, 1989;Litov, Moreton, and Zenger, 2012), in that their compensation is determined by two factors-professional recognition in venues like Institutional Investor and the Wall Street Journal (Fang and Yasuda, 2009;Stickel, 1992), and trading volume and investment banking revenues (Groysberg et al., 2011)-both of which are driven by analysts producing accurate research on which investors can reliably base their decision-making (Gilson et al., 2001). Thus, the economic benefits of analysts initiating coverage of a firm they do not yet cover derive from the financial gains that they enjoy by solidifying their standing as experts and by generating more trading volume and investment banking revenues through their research. ...
Article
Full-text available
Research SummaryThis paper investigates how spinoffs improve the quality of analysts’ research about diversified firms, theorizing that these deals may induce analysts to revisit their earlier coverage decisions. The gains resulting from these shifts are expected to be more pronounced when a firm undertakes a legacy (rather than a non-legacy) spinoff, which removes the business that may be constraining analysts’ coverage decisions in the first place. Consistent with this argument, firms that undertake legacy spinoffs experience greater improvements in the composition and quality of their analyst coverage than their non-legacy counterparts, and in their overall forecast accuracy and stock market performance. Taken together, these findings shed light on the relationships among the scope decisions, analyst coverage, and valuations of diversified firms.Managerial SummaryExisting research has established that when companies undertake spinoffs, analysts produce more accurate forecasts about the divesting firms than they did prior to those deals, and the stock market performance of those firms also improves relative to pre-spinoff levels. This paper explores the effects of legacy spinoffs (the spinoff of a firm's original or ‘legacy’ business) for forecast accuracy and stock market performance. Firms that undertake legacy spinoffs are found to enjoy greater improvements in forecast accuracy and stock market performance than their non-legacy counterparts. These findings are driven by the fact that legacy spinoffs induce analysts to revisit their existing coverage decisions to a greater extent than non-legacy spinoffs, contributing significantly to the economic benefits of these deals for shareholders.
... Moreover, the firm fixed effects model helps to better isolate the effect of digital innovation on firm performance as it only estimates time-variant effects within a firm. For similar reasons, prior empirical studies aiming to draw conclusions on performance effects commonly employ firm fixed effects regressions (e.g.,Litov, Moreton, & Zenger, 2012;Müller, Fay, & vom Brocke, 2018;Pan, Huang, & Gopal, 2018). We again used lagged values of all our independent variables to mitigate potential biases from reverse causality.Specifically, we used the following model to analyze H4: indexes time periods and j the firms. ...
Article
Aiming to support digital innovation endeavours, industrial-age companies increasingly acquire firms that heavily build upon digital technologies. Related research has raised serious concerns regarding the prospects of such plans, yet has not focused the particular context of digital mergers and acquisitions (M&A). Drawing on a knowledge-based perspective as well as the particularities of digital technologies and the context of digital innovation, we theorise the link between digital M&A, a digital knowledge base on the part of the acquirer, and the consequences for digital innovation and firm performance. We employ panel data regressions to a longitudinal dataset of the world’s largest automobile manufacturers. Our findings suggest that executing digital M&A contributes to building the digital knowledge base of industrial-age firms, which in turn enables them to drive digital innovation. Our findings further indicate that digital innovation improves firm performance of industrial-age firms. We discuss implications for information systems research about M&A and digital innovation as well as recommendations for managerial practice.
... Even models of bounded rationality seek to specify some a priori set of (though delimited) uses and functions. Interestingly, economic sociologists and scholars in strategy have also run into this problem in their research, specifically where they now realize that the socially-specified categories of markets, where novelty is discounted (Litov et al., 2012;Zuckerman, 1999)thus presuming a certain type of equilibrium -in fact also suggest many arbitrage opportunities for economic and institutional entrepreneurs. ...
Article
Full-text available
The purpose of this special topic forum is to call for research on the topic of minds and institutions. I briefly discuss three specific research opportunities: (1) bounded rationality versus mind, (2) many minds and the interfaces of institutions, (3) the affordances of institutions and arbitrage. I then briefly introduce the two special topic forum papers and highlight how they link to the topic of minds and institutions.
... Second, our arguments can cast light on the uniqueness paradox and the social categorization of industries. Economic sociologists have pointed out how markets are characterized by what has been labeled a 'categorical imperative'-by a need for firms to belong to well-established, legitimated and understood industries, so as to not be discounted by those who evaluate and make recommendations, such as analysts (Litov et al. 2012;Zuckerman 1999). ...
Article
Full-text available
In this article, we challenge the notion of the efficiency of factor markets and provide an alternative. We specifically identify both the environment- and actor-related origins of heterogeneity in markets. We first discuss how environments have an exaptive nature, where new uses and possibilities emerge continuously and are poised for the taking. We then highlight how actor perceptions result in heterogeneous outcomes, and how the identification of novel affordances—new uses or functions—for factors is a central origin of heterogeneity. We also discuss the existence of actor- and environment-related pressures toward homogeneity and seeming market efficiency. In conclusion, we highlight the implications of our arguments for the strategy and innovation debate, and for our understanding of the nature of markets and economic activity.
... There are many reasons for expecting the impact of female directors on board monitoring will be weaker in wedge firms. For example, risk-averse and conformist family firms are likely to occupy female directors because female nominations consider a deviation from societal norms and are high-risk moves (Litov, Moreton, & Zenger, 2012). ...
Article
Full-text available
Many government sought to enforce gender equality on the corporate boards, but the implication of doing it are not obvious and might harm economies and firms. We underline this topic by conceptualizing the relationship as corporation and board-specific and embedded within specific contexts. The theory is developed with reference to developing countries, and tested on Turkish firms. The result reflects that female directors improve monitoring mechanism for some firms and reduce it for others. The influence is different across various monitoring indicators, control-ownership wedge, and board structure. The impact varies across different audit quality indicators. The findings call for nuanced responses in relation to women’s nominations from both governments and firms.
... Uniqueness in strategy is a necessary condition for creating economic rents and should be positively associated with firm value. However, uniqueness in strategy heightens the cost of collecting and analyzing information to evaluate a firm's future values, and therefore, capital markets systematically discount uniqueness in the strategy choices of firms (Litov, Moreton, & Zenger, 2012). Among intangible assets, technological capability and brand equity, on the other hand, are relatively easy for outsiders to observe, because R&D and advertising expenditures are publicly revealed. ...
Article
This paper examines the extent to which firm’s management practices are valued in the marketplace using the data of interview survey. First, we divide a firm’s market value into its tangible and intangible assets, and further decompose the intangible asset value into the components attributable to advertising, to R&D, and to management practices. We find that the component attributable to management practices is much smaller than the components attributable to R&D or to advertising. We also find that among various management practices, human resource management has a significantly positive impact on Tobin’s q. Some of organizational management variables, however, have significantly negative impacts on Tobin’s q, contrary to the findings of Bloom and Van Reenen (Quarterly Journal of Economics 122:1341-1408, 2007; Journal of Economic Perspectives 24:203-224, 2010) and Bloom et al. (Academy of Management Perspectives 26:12-33, 2012), to which we referred when we conducted interview survey. Then, we further explore the organizational management practice variables to understand why they do not have significantly positive impacts on Tobin’s q. The finer analysis finds that many characteristics of management practices, which are supposed to increase market value of the firms, actually have no significant impact or a negative impact on Tobin’s q. The results suggest that information sharing and coordination within a unit or a team increase the value, while disclosing information and coordinating across units decrease the value. The results also suggest that quick decision making has different impacts on firm’s market value depending upon the contexts. Speedy decision making increases the value in case of new business development, while consultation with the people concerned increases firm’s market value in case of closing the existing business. The different results of this study from the existing ones may suggest that good management practices are different among countries.
... Second, our arguments can cast light on the uniqueness paradox and the social categorization of industries. Economic sociologists have pointed out how markets are characterized by what has been labeled a "categorical imperative"-by a need for firms to belong to well-established, legitimated, and understood industries, so as to not be discounted by those who evaluate and make recommendations, such as analysts (Zuckerman, 1999;Litov et al., 2012). The need to fit established categories might be linked with the more general notion of functional fixedness, specifically where multiple social audiences-not just entrepreneurs-are focused on fixed and established ways of doing things, and where novelty is explicitly avoided and discounted (perhaps due to inabilities to appropriately assess the economic opportunity, or due to various forms of social legitimacy). ...
... Consequently, in the same way that novel scientific theories are more likely to be initially ignored or discarded, the same is also true of novel theories of economic value (Litov et al. 2012, Benner and. Novel theories may poorly fit existing categories used for comparison, evaluation, and classification (Zuckerman 1999), imposing higher costs on outsiders who might be tasked with evaluating these theories (Litov et al. 2012). Thus, more novel theories face the greatest challenge in being funded or supported by other key resources and stakeholders. ...
Article
Full-text available
This paper outlines the theory-based view of strategy and markets. We argue that novel or “great” strategies come from theories. Entrepreneurs and managers originate theories and hypotheses about which activities they should engage in, which assets they might buy, and how they will create value. A firm’s strategy, then, represents a set of contrarian beliefs and a theory—a unique, firm-specific point of view—about what problems to solve, and how to organize and govern the overall process of value creation. We outline the cognitive and perceptual, organizational, and economic foundations of the theory-based view of strategy. We also discuss the essential attributes needed for a firm-level theory of strategy. Throughout the paper we offer informal examples of our argument, by briefly discussing the strategies of companies like Apple, Uber, Disney, Wal-Mart, and Airbnb. The theory-based view of strategy and markets also offers important insights for how firms govern themselves (including ownership, boards, and organization design) and how firms interact with capital markets and external evaluators and stakeholders. We conclude with a discussion of the practical and managerial applications of the theory-based view.
... This point is echoed by Feldman (2015a), who shows that spinoffs (especially "legacy" spinoffs, whereby a firm spins off its original line of business) impel significant changes in the composition and quality of analyst coverage that companies receive. Even further, Bergh et al. (2008) find that managers choose divestiture modes (selloff versus spinoff ) based on how easily they can convey information about the divested assets to external constituents, and Litov et al. (2012) show that firms must strike a balance between the rent-generating potential and the informational discounts that are associated with unique corporate strategies (like divestitures). Together, these studies suggest that managers may proactively undertake divestitures (or specific types of divestitures) to clarify how their firms are perceived by relevant external constituents, extending beyond the idea that divestitures simply reduce information asymmetry in diversified firms. ...
Article
Full-text available
This article provides an introduction to divestitures and the research streams that examine these deals. Divestitures are defined as the removal of one or more of a company’s lines of business via selloff or spinoff. In this article, we describe how research on divestitures has evolved in the finance and strategy literatures, and we explain how to design and conduct empirical research studies on this topic. We also discuss the implications of divestitures for organization design, and outline some directions for future research in this domain.
... We control for total Institutional ownership and Analyst coverage because institutional investors and securities analysts are associated with governance quality (Chen, Harford, and Lin, 2015;Dyck, Morse, and Zingales, 2010), which, in turn, can affect the likelihood of misconduct. We control for the level of each firm's Total product diversification using an Entropy measure (Hoskisson et al., 1993) because information asymmetry between insiders and external stakeholders is higher in highly diversified firms (Litov, Moreton, and Zenger, 2012), providing more opportunities for top managers to engage in misconduct. ...
Article
We examine whether top managers engage in misconduct, such as illegal insider trading, illegal stock option backdating, bribery, and financial manipulation, in response to the presence, or absence, of governance provisions that impose constitutional constraints on shareholder power. Within the agency framework, shareholders typically oppose governance provisions that limit their power because those provisions could undermine shareholder influence and increase agency costs. However, when shareholders support provisions that constrain their power, managers could respond positively by refraining from self-interested behavior in the form of managerial misconduct. We find this to be especially true in industries where these governance provisions are particularly relevant to managers and in scenarios where CEOs do not also serve as board chair. In recent years, shareholders have become central to organizations and the managers that run them. Shareholders and managers establish a rapport with one another, such that the behavior of one affects the behavior of the other. One of the most consequential decisions shareholders can make pertains to the reach of their influence: they can choose to impose strict governance over firms they own or they can allow for constitutional constraints that limit shareholder power. When they act in the mutual interest of managers by allowing such constraints, we find that managers respond in kind by refraining from bad behavior, such as illegal stock options backdating, insider trading, and financial manipulation. This is especially true in industries and scenarios where shareholder pressure is most relevant to managers.
... The strategist must convince stakeholders that an opportunity exists that is worth investing time and money in. Yet, explaining and motivating stakeholders to adopt a strategy is more difficult when the strategy is unique (Benner & Zenger, 2016;Litov, Moreton, & Zenger, 2012). Here we argue that explaining and motivating people in favor of a unique strategy is especially problematic for a strategist who wishes to take advantage of a behavioral opportunity. ...
Article
Full-text available
How performance is perceived and attributed has important implications for strategizing. Much research in the cognitive and social sciences suggests that people tend to mistake luck for skill in evaluations and ignore how future performances regress to the mean. We argue that these systematic mistakes can be translated into an alternative source of profit: informed strategists can take advantage of others’ misattributions of luck by exploiting the false expectations and mispricing in strategic factor markets. We also discuss the learning and interdependency barriers that protect, and thus predict the attractiveness of, a behavioral opportunity and suggest approaches to help overcome these behavioral barriers.
... Under this perspective, mergers and acquisitions are viewed as agency-driven decisions that managers make to enhance their own personal utility or wealth (Amihud and Lev, 1981;Jensen, 1986;Shleifer and Vishny, 1986;Lang and Stulz, 1994;Berger and Ofek, 1995), especially because compensation is strongly correlated with firm scope and size (Jensen and Murphy, 1990;Hall and Liebman, 1998;Gabaix and Landier, 2008). In a similar vein, divestitures are viewed as solutions to the conflicts that resulted from agency-driven scope expansions, such as over-diversification, inefficient cross-subsidization, diluted managerial focus, or information asymmetries (Markides, 1992;Markides, 1995;Comment and Jarrell, 1995;John and Ofek, 1995;Daley et al., 1997;Desai and Jain, 1999;Berger and Ofek, 1999;Ferris and Sarin, 2000;Gilson et al., 2001;Krishnaswami and Subramaniam, 1999;Nanda and Narayanan, 1999;Zuckerman, 1999;Zuckerman, 2000;Litov et al., 2012). Again, though, despite the more negative outcomes that may occur in an agency-driven view of extra-organizational action, the underlying function of managers needing to decide which businesses do and do not belong within the boundaries of their firm remains the same. ...
Article
Full-text available
This essay reflects on the development of corporate strategy as a field of research, seeking to accomplish three main objectives. First, I position corporate strategy within the broader field of strategy research. I argue that because corporate strategy addresses the conceptually distinct question of how managers set and oversee the scope of their firms, scholars in this domain require a unique organizing framework for analyzing it. Second, I offer such a framework, which disaggregates the different topics and phenomena that corporate strategy scholars study into three categories: intra-organizational, inter-organizational, and extra-organizational. Third, I use this framework to lay out an agenda for future research in corporate strategy, as well as some ideas for linking research more closely to practice and policy-making. Given the significance of corporate strategy from academic, practical, and regulatory standpoints, my hope is that this essay will chart a productive course forward for scholars, practitioners, and policy-makers alike.
... Many studies build on the notion that the balanced scorecard "provides relevant, balanced, and concise information to managers, thereby reducing the time for processing information and increasing the time for decision-making" (De Geuser et al., 2009, p. 98). This should not only play to the analysts who are offered incentives to generate more underwriting business for their brokerage house by covering more firms with higher accuracy (Litov, Moreton, Zenger, & Moreton, 2012), but also to the investors. ...
Conference Paper
The usefulness of conference calls has recently attracted increasing interest in academia and corporate practice. Simultaneously, several researchers call for more thorough investigations of the analysts’ function as intermediaries in the firm’s information environment. Based on this, we investigate how firms could use conference call style to better communicate with analysts in order to create superior value by lowering the firm’s cost of equity. To accomplish this, we investigate a large panel of firms from the S&P 500 and MSCI Europe between 2004 and 2013. After controlling for various confounding effects, our results exhibit that an analyst tailored conference call style, comprising the dimensions consistent structure, commitment to engage with analyst and informativeness of content, reduces the firms cost of equity capital systematically. Hence, we highlight the importance that firms think about the analysts' needs before managers speak in a conference call.
... As mentioned above, in many societies, powerful women experience a double bind in terms of gender and leader stereotypes (Eagly and Carli 2007). Such societal perceptions often bias the judgement of the actual performance of women (Lee and James 2007) and thus increase the perceived risk associated with their appointments (Lubomir et al. 2012). The scarcity of female board members on the current board accentuates the perception of the risk associated with new appointments. ...
Article
Full-text available
Although we can observe noticeable progress in gender diversity on corporate boards, these boards remain far from gender balanced. Our paper builds on social identity theory to examine the impact of corporate elites—men and women who sit on multiple corporate boards—on board diversity. We extend the main argument of social identity theory concerning favouritism based on homophily by suggesting that boards with men with multiple appointments are unwilling to include female board members to protect the monopoly value generated by their elite status. The empirical analysis, based on DAX 30 firms in the period of 2010–2015, shows that the presence of multi-board men is negatively associated with women’s participation, while the presence of multi-board women and other women on management boards is positively related to gender diversity on boards. Furthermore, robustness tests support and confirm our conclusion that multi-board men have a significant association with board diversity, even with small size (i.e. 1 or 2). Additionally, we find a significant effect arising from pressure related to the introduction of gender quotas in Germany, effective in 2016, indicating the effectiveness of gender quota policies for board gender diversity.
... There are many reasons for expecting the impact of female directors on board monitoring will be weaker in wedge firms. For example, risk-averse and conformist family firms are likely to occupy female directors because female nominations consider a deviation from societal norms and are high-risk moves (Litov, Moreton, & Zenger, 2012). ...
Article
Full-text available
Many government sought to enforce gender equality on the corporate boards, but the implication of doing it are not obvious and might harm economies and firms. We underline this topic by conceptualizing the relationship as corporation and board-specific and embedded within specific contexts. The theory is developed with reference to developing countries, and tested on Turkish firms. The result reflects that female directors improve monitoring mechanism for some firms and reduce it for others. The influence is different across various monitoring indicators, control-ownership wedge, and board structure. The impact varies across different audit quality indicators. The findings call for nuanced responses in relation to women’s nominations from both governments and firms.
... Bearing the unnecessary costs of adaptation, these firms can enter an endless cycle of failure and unrewarding change (Levinthal & March, 1993). Insufficient consistency may even diminish the firm's legitimacy and increase its cost of capital as investors struggle to make sense of the firm's "headless chicken strategy" (Lamberg et al., 2009;Litov, Moreton, & Zenger, 2012;Rindova, Ferrier, & Wiltbank, 2010). Institutional theory stipulates that firms emulate the actions of firms with high visibility and prestige because stakeholders can look to top performers as a cognitive shortcut when uncertainty is high (Srinivasan, Haunschild, & Grewal, 2007). ...
... Within redeployability, firm-specific redeployment capabilities can be ambiguous to stock investors. Outside the context of redeployability, markets face ambiguity with regard to uniqueness of a combination of businesses with complementary resources (Litov et al., 2012), or to uniqueness of synergy between bidders and the targets in corporate acquisitions (Barney, 1988). This study neither attempts to create a comprehensive model of all types of mispricing nor implies that the explored source is the most important. ...
Article
Research Summary: Stock market undervaluation of resources was often assumed to have strategic implications. Such undervaluation lets firms buy resources relatively cheaply, but it can also constrain resource deployment. This article shows that the option to redeploy a firm's resources to a new business can be undervalued in stock markets when investors face ambiguity about that option due to uniqueness of redeployment. The developed formal model derives conditions under which stock markets undervalue resources. Those conditions are summarized with an empirical operationalization that can be tested with a broad range of strategic implications. Besides, the model provides a more complete account of resource redeployability by demonstrating the redeployability paradox. The paradox highlights that some determinants of redeployability enhance undervaluation, while simultaneously increasing objective value of redeployable resources. Managerial Summary: Stock markets can systematically undervalue resources. On the one hand, such undervaluation creates a profitable opportunity for a firm that needs some resources for its growth and compares the option to buy stock in another firm, whose resource are undervalued, with the option to build those resources internally. On the other hand, such undervaluation poses limits to resource deployment strategies of the undervalued firm. When does such undervaluation occur? This study highlights one possible source for undervaluation, ambiguity that is faced by stock market investors about the option to redeploy a firm's resources to a new business. The study specifies conditions under which stock markets are more likely to undervalue resources. The understanding of those conditions can guide managers toward strategic opportunities.
... Mellahi, Frynas, Sun, & Siegel, 2016), we still know very little about the roles of activists in strategic change, and even less about the influence of these activists' temporal markers. There is also initial evidence that the firms' analysts and media coverage may play an important role with respect to strategic change (Bednar et al., 2013;Litov, Moreton, & Zenger, 2012). In a recent study, Bednar et al. (2013: 910) argued that "the evaluations of firms by outside constituents may influence the decision making of executives." and indeed found that negative media coverage increases the extent of strategic change. ...
Article
Full-text available
In ever-changing environments, strategic change manifests as a crucial concern for firms and is thus central to the fields of management and strategy. Common and foundational to all strategic change research is time—whether recognized in the extant studies or not. In this article, we thus critically review the existing body of knowledge through a time lens. We organize this review along (1) conceptions of time in strategic change, (2) time and strategic change activities, and (3) time and strategic change agents. This approach facilitates our assessment of what scholars do and do not know about strategic change, especially its temporal components. Our review particularly revealed a need to advance scholarly understanding about the processual dynamics of strategic change. We thus extend our assessment by proposing six pathways for advancing future research on strategic change that aim at fostering an understanding of its processual dynamics: (1) temporality, (2) actors, (3) emotionality, (4) tools and practices, (5) complexity, and (6) tensions.
... The preference of analysts to cover focalized firms is justified given the more expensive costs and effort of covering highly diversified firms, although some diversified and unique strategies create value for companies (Litov et al., 2012). The analysts prefer focalized firms so much that 58 they even overestimated future earnings of refocusing firms' in the period 1990-2002, when the core competences concept was popular (Nicolai et al., 2010). ...
Thesis
Full-text available
The objective of this master thesis is to disclose potential constraints in the rationality of financial analysts for the assessment of targets in different phases of the pre-acquisition process. Previous literature on M&A motives and process, valuation techniques, and indicators used by financial analysts in different contexts is explored to gain a better comprehension of the role and influence of these actors on these operations. The rational decision making and the bounded rationality models are introduced to highlight the importance of cognition in business decisions. Combining three exploratory interviews with findings in previous research, potential constraints that may affect analysts' assessment are disclosed, including limits in the availability of information, limits in the interpretation, and the effects of the influence and interaction of different actors during the process. The confirmation of the potential constraints unveiled in this thesis would suppose an important contribution to our understanding of company valuation by influent actors.
... Second, companies may undertake spinoffs to reduce their complexity in the capital markets. When a firm operates in multiple businesses, especially unrelated ones, it can be difficult for external stakeholders to evaluate the coherence of that company's operations (Zuckerman 1999, Nanda and Narayanan 1999, Litov et al. 2012. Spinoffs resolve such problems by removing businesses that may be clouding the perceptions of analysts and investors (Zuckerman 2000, Bergh et al. 2008, Feldman 2016b. ...
Article
Research summary: This article focuses on organizational naming as a strategic choice organizations make to overcome liabilities of atypicality. We argue that, in markets presenting an “illegitimacy discount,” atypical organizations may use deliberate names—names that communicate the market categories to which organizations claim membership—to offset the consequences of atypicality. Using data from the global hedge fund industry, we show that atypical hedge funds are more likely than typical funds to have deliberate names. Importantly, the selection of a deliberate name is economically significant. First, funds with deliberate names grow faster than funds without deliberate names, especially among atypical funds. Second, while atypicality heightened the likelihood of failure during the recent financial crisis—even after controlling for fund performance—having a deliberate name mitigated this effect.
Article
Full-text available
Many governments seek to impose gender equality on boards, but the consequences of doing so are not clear and could harm firms and economies. We shed light on this topic by conceptualizing the relationships as firm- and board-specific and embedded within specific contexts. The theory is developed with reference to emerging markets, and tested on Malaysian firms. We find that female directors create value for some firms and decrease it for others. The impact varies across different performance indicators, firms’ ownership and boards’ structure. The findings call for nuanced responses in relation to women's nominations from both governments and firms.
Article
This paper examines organizational boundary choice from an entrepreneurial perspective. Entrepreneurs create new profit opportunities by recombining existing assets into novel combinations based on their subjective judgment under conditions of uncertainty. In doing so, they become vulnerable to ex post appropriation by owners of uniquely complementary assets, especially where ex ante uncertainty translates into ex post causal ambiguity. Firms are a means by which entrepreneurs overcome this problem, maximizing the appropriation of pure profits from their actions. The paper formalizes this insight in an integrative model of entrepreneurial governance choice, highlighting the trade-offbetween the risk of appropriation and the incremental cost of asset ownership. Comparative statics from this model provide predictions about the conditions under which hierarchical governance will be preferred. In particular, they suggest that firms are preferred where entrepreneurial action results in the creation of combinations of assets that are rare, valuable, and difficult to imitate (i.e., the creation of strategic capabilities). The paper thus contributes to work on the dynamics of capabilities and transaction costs, highlighting the structurally uncertain nature of capability creation and its implications for the theory of the firm.
Article
Full-text available
Research Summary: When describing the future, executives draw analogies between time and space (“we're on the right path,” “the deadline is approaching”). These analogies shape how executives construe the future and influence attitudes to action with long-term benefits but short-term costs. Ego-moving frames (“we are approaching the future”) prompt a focus on the present whereas time-moving frames (“the future is approaching”) underscore the advent of the future as inevitable. Ultimately, action that prioritizes long-term returns depends both on how executives conceive of the future and whether they believe they can engender favorable outcomes. This balance between recognizing the inevitability of the future (time-moving frame) and the capacity to shape outcomes (control beliefs) stands in contrast to the more agentic forms of discourse that are dominant in strategy. Managerial Summary: Executives often prioritize maximizing immediate returns over investing to build a long-term competitive advantage. How they think about the future offers one explanation for this short-termism. This paper distinguishes two ways of framing the future with implications for decision-making. Are we approaching the future (the ego-moving frame), or is it approaching us (the time-moving frame)? As long as executives have confidence in their ability to achieve forecasted results, they focus on long-term returns in their decision-making when they recognize the advent of the future as inevitable (the time-moving frame). In contrast, though executives use the ego-moving frame to show that they are active agents, they weigh future returns less heavily when framing the future in this way.
Article
Acquisitions are often seen as an instrument to outsource the R&D function of the firm, but we know little over how acquirers profit from the redeployment of the target's resources. Using the strategic factor market theory as a guide, this paper explores the conditions under which technology acquirers capture value by generating unique synergies with the target. Analysis of a sample of technology acquisitions suggests that private synergies exist when the acquirer is more technologically proximate to the target as compared to other potential acquirers. This results in a higher acquisition likelihood and stock market reaction to the acquisition announcement. It is also shown that patent ownership allows acquirers to take advantage of heterogeneous resource complementarity and generate inimitable synergies with the target firm. But this effect is evident only in complex technology industries where a relatively high patent portfolio overlap increases the acquisition likelihood and stock market reaction to the acquisition announcement.
Article
Using a text-based measure of geographic dispersion that captures the economic ties between a firm and its geographically distributed economic interests, this study provides evidence that financial analysts issue less accurate, more dispersed and more biased earnings forecasts for geographically dispersed firms. We observe the degree to which a firm has an overlapping distribution of economic centers in comparison to industry competitors and suggest that geographically similar firms have lower information gathering costs and thereby more precise earnings forecasts. Empirical evidence supports this prediction. We further find that the geographic dispersion across the U.S. is less likely to affect forecast precision when a firm has economic activities in states with highly correlated local shocks. Our findings suggest that the effect of geographic dispersion is more pronounced for soft-information environments where information is more difficult to make impersonal by using technological advances. Consistent with the information asymmetry argument, we find that geographically dispersed firms have less comparable and more discretionary managed earnings, have less extensive than industry competitors segment information, are more likely to restate sale segment information, and issue annual and quarterly filings with a delay.
Article
Research Summary: We examine the role of nonventure private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high‐powered incentives, patient capital, and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents’ core area, whose rivals invest more in long‐term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form. Managerial Summary: Private equity firms are often portrayed as destroyers of corporate value, raiding established companies in pursuit of short‐term gain. In contrast, we argue that private equity investors help to revitalize businesses by enabling investments in long‐term strategic resources and capabilities that they are better able to evaluate, monitor, and support than public market investors. Consistent with these arguments, we find that when acquiring businesses divested by public corporations, private equity firms are more likely to buy units outside the parent's core area, those whose peers invest more in R&D than their parents, and those whose parents have weak managerial incentives, especially at the divisional level. Thus, private equity firms systematically target those businesses that may fail to realize their full potential under public ownership.
Article
Full-text available
This paper examines the dynamics of social influence in the choices of securities analysts to initiate and abandon coverage of firms listed on the NASDAQ national market. We show that social proof—using the actions of others to infer the value of a course of action—creates information cascades in which decision makers initiate coverage of a firm when peers have recently begun coverage. Analysts that initiate coverage of a firm in the wake of a cascade are particularly prone to overestimating the firm's future profitability, however, and they are subsequently more likely than other analysts to abandon coverage of the firm. We thus find evidence for a cycle of imitation-driven choice followed by disappointment and abandonment. Our account suggests that institutionalization rooted in imitation is likely to be fragile.
Article
Full-text available
Although it is evident in routine decision-making and a crucial vehicle of rationalization, commensuration as a general social process has been given little consideration by sociologists. This article defines commensuration as the comparison of different entities according to a common metric, notes commensuration's long history as an instrument of social thought, analyzes commensuration as a mode of power, and discusses the cognitive and political stakes inherent in calling something incommensurable. We provide a framework for future empirical study of commensuration and demonstrate how this analytic focus can inform established fields of sociological inquiry.
Article
Full-text available
This study provides evidence of changes in how analysts generate stock recommendations after the SEC's approval of NASD Rule 2711 in May 2002, which introduced regulatory reforms to enhance the independence of analysts' research. We investigate the relations of analysts' stock recommendations with intrinsic value estimates (based on analysts' earnings forecasts relative to the stock prices, V/P) and with investment banking-related conflicts of interest during the 1994−2005 period. We find a stronger relation between analysts' stock recommendations and V/P and a weaker relation between analysts' stock recommendations and conflicts of interest in the post-Rule period than prior to the implementation of the Rule. Moreover, the increases in the relation between stock recommendations and V/P after the implementation of the Rule are greater for the stocks recommended by analysts with greater potential conflicts of interest. Our findings suggest that the implementation of Rule 2711 has enhanced analysts' independence.
Article
Full-text available
Analyst research helps prices reflect information about a security's fundamentals. However, analysts' private incentives potentially contribute to misleading research and it is possible that the market fixates on such misleading and/or optimistic reports. We examine cross-sectional determinants of the informativeness of analyst reports, i.e., their effect on security prices, controlling for endogeneity among the factors affecting informativeness. Analysts are more informative when the potential brokerage profits are higher (e.g., high trading volume and high volatility) and when they reveal "bad news." Analyst informativeness is reduced in circumstances of increased information processing costs. We fail to find evidence that informativeness of analyst reports is due to market's fixation or over- or under-reaction to analyst reports.
Article
Full-text available
According to prevailing theory, firms diversify in response to excess capacity of factors that are subject to market failure. By probing into the heterogeneity of these factors, we develop the corollary that firms that elect to diversify most widely should expect the lowest average rents. An empirical test, with Tobin's q as the measure of rents, is consistent with this theory.
Article
An analysis of new buy and sell recommendations of stocks by security analysts at major U.S. brokerage firms shows significant, systematic discrepancies between prerecommendation prices and eventual values. The initial return at the time of the recommendations is large, even though few recommendations coincide with new public news or provide previously unavailable facts. However, these initial price reactions are incomplete. For buy recommendations, the mean postevent drift is modest (+2.4%) and short-lived, but for sell recommendations, the drift is larger (-9.1%) and extends for six months. Analysts appear to have market timing and stock picking abilities.
Article
No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.
Article
This study provides evidence of changes in how analysts generate stock recommendations after the SEC's approval of NASD Rule 2711 in May 2002, which introduced regulatory reforms to enhance the independence of analysts' research. We investigate the relations of analysts' stock recommendations with intrinsic value esti mates (based on analysts' earnings forecasts relative to the stock prices, V/P) and with investment-banking-related conflicts of interest during the 1994-2005 period. We find a stronger relation between analysts' stock recommendations and V/P and a weaker relation between analysts' stock recommendations and conflicts of interest in the post-Rule period than prior to the implementation of the Rule. Moreover, the in creases in the relation between stock recommendations and V/P after the implemen tation of the Rule are greater for the stocks recommended by analysts with greater potential conflicts of interest. Our findings suggest that the implementation of Rule 2711 has enhanced analysts' independence.
Article
A common view is that there is little correlation between firm performance and CEO pay. Using a new fifteen-year panel data set of CEOs in the largest, publicly traded U. S. companies, we document a strong relationship between firm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980, largely because of increases in stock option grants.
Article
The issue of corporate control is examined through an analysis of the de-diversification activity of publicly held American firms from 1985 to 1994. Prominent accounts of such behavior depict newly powerful shareholders as having demanded a dismantling of the inefficient, highly diversified corporate strategies that arose in the late 1950s and the 1960s. This paper highlights an additional factor that spurred such divestiture: the need to present a coherent product identity in the stock market. It is argued that because they straddle the industry categories that investors—and securities analysts, who specialize by industry—use to compare like assets, diversified firms hinder efforts at valuing their shares. As a result, managers of such firms face pressure from analysts to dediversify so that their stock is more easily understood. Results indicate that, in addition to such factors as weak economic performance, de-diversification is more likely when a firm's stock price is low and there is a significant mismatch between its corporate strategy and the identity attributed to the firm by analysts.
Article
This paper relates quality and uncertainty. The existence of goods of many grades poses interesting and important problems for the theory of markets. On the one hand, the interaction of quality differences and uncertainty may explain important institutions of the labor market. On the other hand, this paper presents a struggling attempt to give structure to the statement: “Business in under-developed countries is difficult”; in particular, a structure is given for determining the economic costs of dishonesty. Additional applications of the theory include comments on the structure of money markets, on the notion of “insurability,” on the liquidity of durables, and on brand-name goods.
Article
This paper develops and tests an information-based model for conditions under which analysts earnings forecasts are likely to be more accurate than forecasts of time-series models. Three information variables are considered, namely the dimensionality of the information set, the precision of the information items, and the correlation amongst the information items. The respective proxy variables for the information variables are firm size, extent of agreement amongst analysts, and the number of lines of business the firm operates in. Evidence is provided that analysts are likely to be more accurate than time series models for larger firms and for firms whereby analysts have more homogeneous earnings forecasts.
Article
This paper argues that the efficiency of the price-setting process in the stock market is contingent on the coherence of a stock's position in the industry-based classificatory structure that guides valuation. While this structure helps investors interpret ambiguous economic news, it is imperfect because stocks vary in the extent to which they are coherently classified, as revealed by the stocks'position in the network of coverage by securities analysts. The main hypotheses are that incoherent stocks are traded more often because such stocks are more likely to be subject to differences in the interpretive models used to understand material information; and that both volume and volatility are higher for incoherent stocks because convergence on a common interpretation relies more heavily on self-recursive market dynamics. These hypotheses are validated via analyses of market activity in the aftermath of first-quarter earnings announcements for U.S.- based firms from 1995 to 2001. The results help reorient research away from debates as to whether financial-market activity is excessive and toward the mechanisms that underlie such activity. More generally, the approach advanced in this paper illustrates how structural sociology may illuminate the structural bounds on market efficiency.
Article
This article explores the social processes that produce penalties for illegitimate role performance. It is proposed that such penalties are illuminated in markets that are significantly mediated by product critics. In particular, it is argued that failure to gain reviews by the critics who specialize in a product's intended category reflects confusion over the product's identity and that such illegitimacy should depress demand. The validity of this assertion is tested among public American firms in the stock market over the years 1985-94. It is shown that the stock price of an American firm was discounted to the extent that the firm was not covered by the securities analysts who specialized in its industries. This analysis holds implications for the study of role conformity in both market and nonmarket settings and adds sociological insight to the recent "behavioral" critique of the prevailing "efficient-market" perspective on capital markets.
Article
We examine implications of the conjecture that analysts announce recommendations and forecasts selectively, based upon whether their information about the firm is favorable. We propose this as an alternative to the common assumption that analysts introduce bias into their forecasts, and provide empirical evidence on this alternative. An effect of selective reporting is that ex post observed distributions of earnings forecast errors appear over-optimistic, even if each forecast is unbiased ex ante. This occurs because high forecasts are both more likely to be observed and more likely to be over-optimistic than low forecasts, for any given realization. We find strong evidence supporting the self-selection conjecture in analyst recommendations, and generally consistent evidence in analyst forecast errors. We also document that analysts avoid issuing negative information by sparse use of sell recommendations and by delaying downgrades, but not by avoiding downgrades altogether.
Article
This paper documents that the weighting of analysts' annual earnings forecasts implicit in security prices is lower than the historical relation between financial analysts' forecasts and realized earnings. Short positions in securities in the bottom decile and long positions in the top decile of the cross-sectional distribution of analysts' early-in-the-year earnings forecasts generate significant hedge-portfolio returns in the year after portfolio formation. This delayed price response is more pronounced for firms with relatively low analyst coverage, consistent with the premise that low financial analyst coverage is associated with a variety of factors that impede the information efficiency of the security market. The hedge-portfolio returns concentrate in the months of subsequent quarterly earnings announcements, suggesting that the delayed security price adjustments reflect the market's failure to incorporate information in analysts' forecasts about future earnings, rather than deficiencies in our conditional expectations of security returns.
Article
We investigate the association between corporate international diversification and the accuracy and bias of consensus analysts' earnings forecasts. We find that greater corporate international diversification is associated with less accurate and more optimistic forecasts. Our results suggest that international diversification reflects unique dimensions of forecasting difficulty that are not captured in previously identified determinants. This evidence suggests that as firms become more geographically diversified, forecasting their earnings becomes more complex.
Article
Whereas prices serve to allocate many resources in market economies, there remain vast reservoirs of unpriced resources to be managed. Business management and strategy concerns the creation, evaluation, manipulation, administration, and deployment of unpriced specialized scarce resource combinations. This paper applies the formalism of cooperative game theory to these concerns. In cooperative game theory, rents appear as the negotiated payments for the services of scarce valuable resources. The division of surplus is determined by the relative values created by different use combinations of resources. Within this framework, the strategy problem is clearly seen as one of discovering or estimating the value of various resource combinations. New wealth can be created by trade in resources as long as there are hitherto unexamined combinations. Copyright © 2003 John Wiley & Sons, Ltd.
Article
This paper examines whether firms emerging from conglomerate stock breakups are able to affect the types of financial analysts that cover their firms as well as the quality of information generated about their performance. Our sample comprises 103 focus-increasing spin-offs, equity carve-outs, and targeted stock offerings between 1990 and 1995. We find that, after these transactions, sample firms experience a significant increase in coverage by analysts that specialize in subsidiary firms’ industries, and a 30–50% increase in analyst forecast accuracy for parent and subsidiary firms. The improvement in forecast accuracy is partially attributable to expanded disclosure. However, forecast improvements for specialists exceed those for non-specialists, leading us to conclude that corporate focus can facilitate improved capital market intermediation by financial analysts with industry expertise.
Article
We document that purchasing (selling short) stocks with the most (least) favorable consensus recommendations, in conjunction with daily portfolio rebalancing and a timely response to recommendation changes, yield annual abnormal gross returns greater than four percent. Less frequent portfolio rebalancing or a delay in reacting to recommendation changes diminishes these returns; however, they remain significant for the least favorably rated stocks. We also show that high trading levels are required to capture the excess returns generated by the strategies analyzed, entailing substantial transactions costs and leading to abnormal net returns for these strategies that are not reliably greater than zero.
Article
This study examines the relation between analysts' incentives to cover firms and the extent of their intangible assets. Because intangible assets typically are unrecognized and estimates of their fair values are not disclosed, absent analyst coverage firms with more intangible assets likely have less informative prices. Accordingly, we expect analysts have greater incentives to cover firms with more intangible assets and, thus, predict they have higher analyst coverage. As predicted, we find that analyst coverage is significantly greater for firms with larger research and development and advertising expenses relative to their industry, and for firms in industries with larger research and development expense. We also predict and find that analyst coverage is increasing in firm size, growth, trading volume, equity issuance, and perceived mispricing, and is decreasing in the size of the firm's analysts' brokerage houses and the effort analysts expend to follow the firm. These findings indicate that analyst coverage depends on private benefits and costs of covering a firm. We also test hypotheses related to analyst effort. We predict and find that analysts expend greater effort to follow firms with more intangible assets, after controlling for other factors associated with analyst effort. Our evidence indicates that intangible assets, most of which are not recognized in firms' financial statements, are associated with greater incentives for analysts to cover such firms, and greater costs of coverage. An open question is whether financial statement recognition of intangible assets could more efficiently provide information about such assets to investors.
Article
Given incomplete factor markets, appropriate time paths of flow variables must be chosen to build required stocks of assets. That is, critical resources are accumulated rather than acquired in "strategic factor markets" (Barney [Barney, J. 1986. Strategic factor markets: Expectations, luck, and business strategy. Management Sci. (October) 1231--1241.]). Sustainability of a firm's asset position hinges on how easily assets can be substituted or imitated. Imitability is linked to the characteristics of the asset accumulation process: time compression diseconomies, asset mass efficiencies, inter-connectedness, asset erosion and causal ambiguity.
Article
Much of the current thinking about competitive strategy focuses on ways that firms can create imperfectly competitive product markets in order to obtain greater than normal economic performance. However, the economic performance of firms does not depend simply on whether or not its strategies create such markets, but also on the cost of implementing those strategies. Clearly, if the cost of strategy implementation is greater than returns obtained from creating an imperfectly competitive product market, then firms will not obtain above normal economic performance from their strategizing efforts. To help analyze the cost of implementing strategies, we introduce the concept of a strategic factor market, i.e., a market where the resources necessary to implement a strategy are acquired. If strategic factor markets are perfect, then the cost of acquiring strategic resources will approximately equal the economic value of those resources once they are used to implement product market strategies. Even if such strategies create imperfectly competitive product markets, they will not generate above normal economic performance for a firm, for their full value would have been anticipated when the resources necessary for implementation were acquired. However, strategic factor markets will be imperfectly competitive when different firms have different expectations about the future value of a strategic resource. In these settings, firms may obtain above normal economic performance from acquiring strategic resources and implementing strategies. We show that other apparent strategic factor market imperfections, including when a firm already controls all the resources needed to implement a strategy, when a firm controls unique resources, when only a small number of firms attempt to implement a strategy, and when some firms have access to lower cost capital than others, and so on, are all special cases of differences in expectations held by firms about the future value of a strategic resource. Firms can attempt to develop better expectations about the future value of strategic resources by analyzing their competitive environments or by analyzing skills and capabilities they already control. Environmental analysis cannot be expected to improve the expectations of some firms better than others, and thus cannot be a source of more accurate expectations about the future value of a strategic resource. However, analyzing a firm's skills and capabilities can be a source of more accurate expectations. Thus, from the point of view of firms seeking greater than normal economic performance, our analysis suggests that strategic choices should flow mainly from the analysis of its unique skills and capabilities, rather than from the analysis of its competitive environment.
Article
We estimate diversification's effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firm's actual value implies a 13% to 15% average value loss from diversification during 1986–1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment and cross-subsidization contribute to the value loss. The loss is reduced modestly by tax benefits of diversification.
Article
Using virtually all publicly available analyst earnings forecasts for a sample of 58 companies in the 1980–1986 period (over 23,000 individual forecasts by 100 analyst firms), our evidence indicates that individual analyst earnings forecasts are informative, even when they are preceded by earnings forecasts made by other analysts or by corporate accounting disclosures. However, our results indicate that analysts earnings forecasts contain only roughly 66% of the information reflected by security prices prior to the forecast-release date.
Article
Aggregate merger waves could be due to market timing or to clustering of industry shocks for which mergers facilitate change to the new environment. This study finds that economic, regulatory and technological shocks drive industry merger waves. Whether the shock leads to a wave of mergers, however, depends on whether there is sufficient overall capital liquidity. This macro-level liquidity component causes industry merger waves to cluster in time even if industry shocks do not. Market-timing variables have little explanatory power relative to an economic model including this liquidity component. The contemporaneous peak in divisional acquisitions for cash also suggests an economic motivation for the merger activity.
Article
Financial reporting and disclosure are potentially important means for management to communicate firm performance and governance to outside investors. We provide a framework for analyzing managers’ reporting and disclosure decisions in a capital markets setting, and identify key research questions. We then review current empirical research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure. Our survey concludes that current research has generated a number of useful insights. We identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.
Article
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can predict the profitability of analysts’ recommendations. We document that the percentage of buys decreased steadily starting in mid-2000, likely due, at least partly, to the implementation of NASD Rule 2711, requiring the public dissemination of ratings distributions. Additionally, we find that a broker's ratings distribution can predict recommendation profitability. Upgrades to buy (downgrades to hold or sell) issued by brokers with the smallest percentage of buy recommendations significantly outperformed (underperformed) those of brokers with the greatest percentage of buys.
Article
We show that inflows of capital into venture funds increase the valuation of these funds’ new investments. This effect is robust to (i) controlling for firm characteristics and public market valuations, (ii) examining first differences, and (iii) using inflows into leveraged buyout funds as an instrumental variable. Interaction terms suggest that the impact of venture capital inflows on prices is greatest in states with the most venture capital activity. Changes in valuations do not appear related to the ultimate success of these firms. The findings are consistent with competition for a limited number of attractive investments being responsible for rising prices.
Article
This paper examines the major determinants of the number of analysts following a firm. A simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm's analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm. Almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition.
Article
This chapter summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.
Article
We examine the effect of underwriting relationships on analysts' earnings forecasts and recommendations. Lead and co-underwriter analysts' growth forecasts and recommendations are significantly more favorable than those made by unaffiliated analysts, although their earnings forecasts are not generally greater. Investors respond similarly to lead underwriter and unaffiliated `Strong buy' and `Buy' recommendations, but three-day returns to lead underwriter `Hold' recommendations are significantly more negative than those to unaffiliated `Hold' recommendations. The findings suggest investors expect lead analysts are more likely to recommend `Hold' when `Sell' is warranted. The post-announcement returns following affiliated and unaffiliated analysts' recommendations are not significantly different.
Article
A large body of research has explored the factors that impede established firms' responses to radical technological changes. While it is widely acknowledged that managers face pressures from financial markets to choose strategies that maximize shareholder value, little work in the technological change literature has considered the possible influences of public equity markets and the securities analysts who mediate them on incumbent firms challenged with technological change. In this paper, I begin to address the topic by empirically exploring how securities analysts react to the different strategies undertaken by incumbent firms faced with radical technological change. I study the question in two settings: the shift to digital technology in photography and the advent of Voice over Internet Protocol (VoIP) technology in wireline telecommunications. I find evidence that analysts are more attentive and positive toward incumbents' strategies that extend and preserve the existing technology than toward strategies that respond directly to the new technology. In these settings, analysts largely ignore incumbents' strategies that directly incorporate the new technology for several years following the discontinuity. This study provides insights into the nature and direction of analysts' reactions to firms' strategies in the context of technological change, and is a first step toward better understanding of the potential role of analysts' and financial markets in incumbent adaptation.
Article
We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference-in-differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst. These results are significantly stronger for firms that are smaller, have less analyst coverage, have a bigger increase in information asymmetry, and are more financially constrained.
Article
The General Theory of Employment, Interest, and Money / John Maynard Keynes Note: The University of Adelaide Library eBooks @ Adelaide.
Article
I. Introduction, 488. — II. The model with automobiles as an example, 489. — III. Examples and applications, 492. — IV. Counteracting institutions, 499. — V. Conclusion, 500.
Article
This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set whi