Title: Meet me halfway: Financial analysts and strategic change

Abstract:

To succeed, firms must promptly respond to or anticipate changes in the business environment through strategic reallocation of internal resources. However, it is widely accepted that strategic change presents a substantial challenge for most organizations. One of the most commonly mentioned reasons for this challenge is the short-termism induced by financial markets. Specifically, a significant body of literature suggests that financial analysts are often unable or unwilling to update their frames of reference for evaluating novel firm strategies. Therefore, they may choose to stop following innovative firms. This can lead to negative impacts on firms’ market performance and, most importantly, on managers’ careers. Thus, the presence of financial analysts can discourage managers from innovating and implementing change. This prevailing theory, however, relies on two key assumptions. First, it presumes that analysts face identical cognitive costs when assessing the strategies of all firms. Second, it overlooks the active role that managers can play in reducing analysts' cognitive effort by providing more comprehensive and reliable information on their actions and intended strategies. In this paper, we challenge these assumptions and propose that if firms are willing and able to share pertinent information, analysts’ search costs can decrease, thereby increasing the likelihood that analysts will evaluate change initiatives positively. In other words, when firms are more transparent, financial analysts’ coverage can actually promote strategic change. Our empirical findings robustly support our theory.

Bio:

https://www.luiss.it/faculty/355599