Salient Expectations? Incongruence across Capability and Integrity Signals and Investor Reactions to Organizational Misconduct

Abstract

Research in signaling theory has recently begun to explore how audiences process signal sets and the incongruence across the signals within. However, prior studies have assumed homogenous compositions of signal sets, and thus unidimensional signal incongruence, although social evaluations tend to involve simultaneous processing of different dimensions. In this study, we examine audiences’ responses to the interdimensional incongruence between capability and integrity signals, particularly by focusing on how the salience of positive capability signals aggravates investor reactions to organizational misconduct, a negative integrity signal. Using irregular financial restatements as the negative integrity signals and prior alliance announcements as the positive capability signals, we find that investors react more negatively to restatements by firms whose alliance announcements are more salient—that is, the firms that announce more frequently and firms that create more positive expectations from those announcements. We also find that firm size and level of diversification weaken these negative effects. We contribute to research on signaling theory, social evaluations, organizational misconduct, and alliances.