Capital Market Reactions to Managerial Framing of Emerging Strategic Issues

Abstract

Emerging strategic issues in firms’ environment, such as trends toward sustainability or digitalization, may threaten organizational survival and require strategic responses. The recent literature shows that a critical challenge in times of emerging issues is to convince external stakeholders, such as investors, of the need for strategic change. Thus far, however, we know little about how managers should frame emerging strategic issues vis-à-vis external stakeholders, such as analysts or investors, to achieve positive resonance and garner support for their strategies. To address this shortcoming, in this paper, we investigate how the managerial framing of environmental sustainability as an important emerging issue shapes capital market responses. We find that while a higher frequency of mentioning environmental sustainability is connected with a more negative capital market response, a positive tone is linked with a positive one. Contrary to expectations, we find that a positive tone is particularly effective in driving positive capital market responses for firms with low performance in terms of environmental sustainability. Moreover, we show that more uncertain language positively moderates the relationship between a positive tone and capital market responses when managers frame the issue of environmental sustainability. Overall, by showing how managers can elicit positive capital market responses to emerging strategic issues through framing, our study makes significant contributions to the literature on strategic change, framing, and corporate sustainability.