Security Analysts and Strategic Decision Making: The Disparate Effects of Loss & Adaptation-Pressure

Abstract

This paper adopts a legitimacy perspective to study the influence of security analysts on firms’ strategic decisions. In particular, we question how security analysts’ earnings pressure influences firms’ acquisition decisions. In line with prior work, we rely on legitimacy arguments to elucidate the ‘security analysts’ – ‘acquisition decision’ relationship, yet differentiated among two disparate mechanisms: Loss-pressure is defined as firms’ actual shortfall from analysts’ previous performance forecasts. It implies a loss in legitimacy and, thereby, suspends strategic decision making (i.e. acquisition decisions). Adaptation-pressure arises as analysts’ forecasts fall short of firms’ current or future profitability. It implies a mismatch in firms’ and analysts’ future expectations, inducing firms’ strategic decision making in order to realign with analysts’ believes and, hence, regain legitimacy. Studying panel data on S&P 1500 firms over a period of 21 years we find support for both mechanisms. We contribute by demonstrating the influence of security analysts on acquisition decisions, as well as by scrutinizing the mechanisms behind this influence. We introduce two possibilities to lose legitimacy and show their disparate effects on firms’ strategic decision making.