Research Summary Activist hedge funds are the new breed of corporate raiders, yet we know little about how the management and board of target firms respond to activist investors. Using a behavioral perspective, we propose that an activist's reputation for being confrontational conveys information to the target company as to what they are likely to encounter in an activist campaign. To avoid the potential adverse consequences of engaging in such a contest, we propose and find that target companies are more likely to settle with an activist known for being confrontational. Our study contributes to corporate governance research by providing insight into the importance of the social context surrounding activist campaigns and the role of reputation in influencing how companies respond to activist investors. Managerial Summary Given that hedge fund activism is having a major impact on firm's strategic and financial decision-making, it is important to understand how these activist investors influence companies. An activist campaign is a highly disruptive event leading to considerable ambiguity and uncertainty as to what is likely to transpire. Given this information void, our study finds that the board and management respond based on the reputation of the activist investor that has taken a stake in the company. That activist investors with a reputation for being hostile are more successful may be a defensive response on the part of management in order to avoid the potential adverse consequences of a hostile campaign. This has implications for corporate governance and the fiduciary duty of the board.
Academy of Management Journal
Despite their prevalence and significance, competitive wars have received limited attention from the strategy literature. Our knowledge of how inter-organizational linkages influence competitive wars is particularly lacking. Drawing on the social embeddedness perspective, we argue that both direct linkages (i.e., strategic alliances) and indirect linkages (i.e., common ownership ties and common analyst ties) reduce the likelihood of war, thereby functioning as the glue that binds firms together. Yet once competitive wars are launched in related markets, indirect linkages through common third parties may continuously function as glue, reducing the likelihood of war spillover, whereas direct linkages, such as strategic alliances, may facilitate the spillover of competitive wars, akin to adding gasoline to a fire. Using data from the U.S. domestic airline industry between 1991 and 2010, our empirical evidence offers strong support for our predictions.
It has been recognized that previous experiences can provide different types of feedback. However, it has not been systematically explored why firms are more likely to learn effectively from certain types of experience than others. From a feedback-based learning perspective, we argue that it is useful not only to focus on feedback valence (success or failure experiences) but also to examine feedback saliency (the magnitude of the experience’s influence). Based on a sample of acquisitions by U.S. firms, our results indicate that a firm’s success experience drives up the premium that it pays for a subsequent acquisition, whereas a failure experience reduces this subsequent premium. Moreover, we find that the magnitude of the effects of the four types of experiences—small failure, big failure, small success, and big success—does not follow a symmetrical pattern of inverse effects.
79th Academy of Management Annual Meeting
This study investigates the role of self-enforced and third party-enforced interorganizational relationships (IORs) in influencing the spillover of price wars. Unlike previous research that emphasized economic factors (e.g., demand fluctuations and firm financial health) that precipitate price wars, this study underscores the relational aspect of price wars. Specifically, we argue that although self-enforced and third party-enforced relationships among competitors may both reduce the likelihood of price wars; once a war has started, third-party- enforced relationships will reduce the likelihood that a price war will spread into additional markets, while self-enforced relationships will increase the likelihood of such spillover. Using data from the United States (US) domestic airline industry from 1992 to 2010, our empirical evidence offers strong support for our predictions. By signifying the importance of IORs in the spillover of price wars, we hope to contribute to research on interorganizational relationships, as well as research on competition.
79th Academy of Management Annual Meeting
Scholars have long been concerned that short-termism negatively affects many corporate decisions. In the past decade, scholars from a variety of perspectives have moved past anecdotal evidence to contribute large-scale empirical insights about the role of time horizon and related temporal factors in the development of firm strategies. Because these insights originated in multiple research streams, different terms have been used in reference to similar concepts. This symposium brings together scholars from those different perspectives to summarize some of the similarities in their past work and discuss how future research can consolidate the gains of the past decade and engage new challenges going forward.
Journal of the Academy of Marketing Science
Despite the clearly visible effects of analysts’ pressures on C-level executives in the popular press, there is limited evidence on their effects on marketing spending decisions. This study asks two questions. First, how do analysts’ pressures affect firms’ short-term marketing spending decisions? Based on a sample of 2706 firms during 1987–2009 compiled from Institutional Brokers Earning System, COMPUSTAT, and CRSP databases we find that firms cut marketing spending. Second, more importantly, we ask if firms which remained more committed in the past to marketing spending under analysts’ pressures have higher longer-term stock market performance. We find that the stock market performance of firms more committed to marketing spending under past periods of analysts’ pressures is higher. The findings are replicated for R&D spending and are robust across measures, controls, and methodologies. Consideration of two industry-based moderators, R&D spending and revenue growth, and one firm-based moderator, whether the firm is among the industry’s top four market share or other lower share firms, reveals that the findings are stronger for high R&D and growth industries and lower market share firms. One key implication is that top executives respond to analysts’ pressures by cutting marketing spending in the short term; however, if they can resist these pressures, longer-term stock market performance is higher.
Analysts’ earnings expectations
Stock market return
Value of marketing
Pressure to meet or beat earnings forecasts from securities analysts leads managers of publicly traded firms to improve short-term earnings by cutting strategic investments at the expense of long-term competitiveness. Drawing on the behavioral theory of the firm, we explore how different dimensions of performance feedback moderate managerial responses to this pressure. We find that the negative impact of earnings pressure on a firm's strategic investments is strengthened when it receives performance feedback from lower stock returns but is weakened when the firm receives performance feedback from lower sales growth. When both dimensions of performance feedback are present, we find that sales growth has a stronger moderating effect. Our paper contributes to the developing literature on multiple dimensions of performance feedback by demonstrating how stock price and sales growth differentially influence managerial responses to earnings pressure. From a management standpoint, we highlight the possibility that performance feedback influences managerial responses to earnings pressures in ways that managers may not fully consider.