How analyst recommendation change influences strategic change

Abstract

PurposeThe purpose of this paper is to examine how analyst recommendation change is associated with a firm’s magnitude of strategic change.Design/methodology/approachThis study argues that unfavorable analyst recommendation change serves as a powerful external assessment that current strategies are inappropriate and that changes are needed. This study also incorporates the moderating roles of CEO power and board’s informal hierarchy in the relationship between analyst recommendation change and firm’s magnitude of strategic change. Results from a sample of 824 observations generally support our predictions.FindingsThe findings of this study show that the greater the analysts downgrade for the company’s stock, the larger the magnitude of strategic change will be made. This study also considers the moderating roles of CEO power and the clarity of board’s informal hierarchy. In particular, the higher the CEO power, the weaker the relationship between analyst recommendation change and the magnitude of strategic change will be. The higher the clarity of board’s informal hierarchy, the more positive the relationship between analyst recommendation change and the magnitude of strategic change will be.Originality/valueIt extends research on the external predictors of strategic change by incorporating the role of unfavorable analyst recommendation change. In addition, it contributes to institutional theory by showing how external legitimacy pressure and internal corporate governance tool complement each other.