Strategic Management Journal10

Journal of Management Studies 47:1 January 2010 doi: 10.1111/j.1467-6486.2009.00862.
What Wall Street Wants Exploring the Role of Security Analysts in the Evolution and Spread of Management Concepts
joms_862 162..190
Alexander T. Nicolai, Ann-Christine Schulz and Thomas W. Thomas

Carl von Ossietzky University, Oldenburg
This paper discusses the role of security analysts in the dissemination of popular management concepts, drawing on neo-institutional and management fashion theory. Focusing on the core competence concept, we investigate whether security analysts swing with the popularity of a management concept or serve as a corrective that secures the rationality of managerial actions. Through our analysis, which uses data for US-based rms spanning the period 19902002, we show that during the 1990s analysts systematically overvalued the future earnings of refocusing rms that incorporated principles derived from the core competence concept. Moreover, we present evidence that their valuations were positively inuenced by the popularity of the core competence discourse and exhibited a systematic bias. Our results suggest a more nuanced understanding of the dynamics underlying the popularization processes of management concepts. In addition to the classical bandwagoneffects discussed in neo-institutional theory, we argue that the mediating role of security analysts and their impact on stock-market prices promote the diffusion of new management concepts.
INTRODUCTION Some nancial history is illuminating. In the mid-1960s Wall Street engineered a wave of conglomerate mergers with the hope that they would produce important synergies. (The Wall Street Journal, 2000) Now Wall Street wants . . . Boeing to be like the rest of corporate America: lean, responsive and focused . . . (The Seattle Times, 1998)
Address for reprints: Alexander T. Nicolai, Carl von Ossietzky University Oldenburg, Fakultaet II/Institute for Business Administration and Business Education, Ammerlaender Heerstr. 114118, 26129 Oldenburg, Germany (alexander.nicolai@uni-oldenburg.de).
2009 Blackwell Publishing Ltd and Society for the Advancement of Management Studies. Published by Blackwell Publishing, 9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
What Wall Street Wants
163
Then, in the usual way, they [the conglomerates] became deeply unfashionable. Today, they may not be back in vogue exactly; but they are certainly back in business. (The Sunday Telegraph, 2004) Throughout the 1960s and 1970s, it was taken for granted that the conglomerate was the most modern organizational structure (Davis et al., 1994). However, in the 1980s the highly diversied company was viewed more and more critically. During the 1990s keywords such as refocusing, concentration on core competencies, and portfolio streamlining became popular. More recently, the pendulum seems to have begun swinging back again with business rhetoric reconverting to the particularly fertile middle ground between focus and diversication (Harper and Viguerie, 2002, p. 30). Changes in the corporate landscape, such as restructuring and mergers and acquisitions (M&A) activities, can be construed in part as a result of this reversal. This article analyses the role of capital-market actors in the promotion and popularization of management concepts. Management concepts are fairly stable bodies of knowledge about what managers ought to do and consist of a system of assumptions, accepted principles and rules of procedure (Birkinshaw et al., 2008, p. 828). What Wall Street wants increasingly shapes what managers believe to be appropriate forms of management (Brancato, 1997; Davis et al., 1994; Useem, 1996) and it is, therefore, reasonable to suggest that capital market actors have an inuence on the popularization of management concepts. Especially, the monitoring activities of security analysts employed by investment banks, investment advisory services, and brokers may be inuential ( Jensen and Meckling, 1976). Conventional nance theory states that these analysts play . . . an important role in making the security markets more efcient (Moyer et al., 1989, p. 503). According to this rational (Birkinshaw et al., 2008, p. 828) or economic view (Marcus et al., 1995, p. 119), while nancial analysts suppress ineffective concepts, they foster the spread of ideas that make organizations work more effectively. The capital market disciplines managers (e.g. Fama and Jensen, 1983) to maximize shareholder wealth and, as a consequence, in a free competition with fair rules, the best ideas ultimately will win out (Marcus et al., 1995, p. 119). However, the cyclical nature of the popularity of management concepts has led certain authors to question whether the role of analysts is portrayed accurately from a purely economic viewpoint. There are, for instance, some widespread claims that analysts can also foster irrational behaviour: the negative side-effects of the shareholdervalue movement or the systematic over-optimism of analysts during the dot.com wave are often cited as examples of such behavior (e.g. Arend, 2006; Lazonick and OSullivan, 2000). Similar claims have been made in the context of the diversication versus refocusing debate. In particular, neo-institutionalists argue that ideas about good management do not spread solely on the basis of rational criteria (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). From the viewpoint of neo-institutional theory, organizations are bound by a social framework of norms, values, and assumptions that determine what is deemed appropriate or acceptable economic behaviour. Management fashion theory which emerged in the last decade as a widely discussed perspective that explained the diffusion of management ideas builds on and extends
2009 Blackwell Publishing Ltd and Society for the Advancement of Management Studies
164
A. T. Nicolai et al.
neo-institutional theory (e.g. Abrahamson, 1996; Kieser, 1997; Newell et al., 2001). Management fashions are commonly shared beliefs about appropriate concepts for business management (Abrahamson, 1996). A management concept becomes a management fashion when it is taken up by a signicant number of managers (Birkinshaw et al., 2008, p. 831), who jump on the bandwagon to appear progressive and gain support by stakeholders. One of the most inuential management concepts of the 1990s was the core competence approach, which is usually attributed to Prahalad and Hamel (1990). These management gurus (Huczynski, 1993; Wooten et al., 2005) argued that companies should develop their strategy and structure around their core competencies. In practice, during that period the core competence concept was often used to justify refocusing measures. Management fashion theorists believe that the popularity of a particular management technique is the result of a fashion-setting process, which is primarily shaped by business schools, management consultancies, management gurus, and the business press, but they tend to ignore the role of the capital market. In our view, there are good reasons why management fashion theorists should examine the role of security analysts in more detail. Drawing on neo-institutional and management fashion literature, in the following sections we will integrate the role of security analysts into the processes through which management concepts become fashionable and ultimately institutionalized. In particular, we will address two main research questions: rst, is there a link between analysts valuations and the popularity of particular management concepts? And second, if there is such a link, do security analysts follow management fashions and help disseminate and perpetuate them? We will empirically analyse these questions in the context of the emergence and spread of the core competence concept and the accompanying refocusing wave that took place in the 1990s. In particular, we will examine the forecasts of security analysts with relation to publicly listed companies that follow management fashions, and put forward the hypothesis that those forecasts show a systematic bias. By exploring the role of analysts we extend the existing debate on the diffusion of popular management concepts and thus help to shed more light on the origins and boundary conditions of management fashions. Our study suggests an alternative understanding of the dynamics underlying the popularization processes of management concepts. In addition to the classical bandwagoneffects discussed in neo-institutional theory, here we explore how the mediating role of security analysts and their impact on stock-market prices promote the diffusion of new management trends in publicly listed companies. Our topic is also of relevance to managers. In particular, the managers of publicly listed corporations experience increasing pressure to align the strategies and structure of their companies with the expectations of the capital market (e.g. Dobbin and Zorn, 2005). A better understanding of management fashions can help managers to decide when it is appropriate (and when it is not) to strive to meet those expectations. The article is organized as follows: we rst discuss the role of security analysts in the institutionalization processes of popular management concepts before we turn to a discussion on the refocusing wave in the period 19902002 when many companies reduced their degree of diversication. We argue that this movement can be attributed to the core competence discourse that burgeoned in the 1990s. In our empirical study we
165
use regression analyses to quantify the association between analyst forecasts, refocusing strategies and the core competence discourse.
THE SPREAD OF MANAGEMENT CONCEPTS AND THE CAPITAL MARKET Institutionalization, Management Fashions, and the Capital Market Management concepts become institutionalized if they are adopted because actors orient their choices to cognitive structures that are shared across societies, rather than to rational costbenet calculations. In particular, when the benets of a management idea are highly uncertain, organizations tend to base their decision of which administrative technology to use on the decisions of other organizations (Abrahamson, 1991, p. 591). In the neo-institutionalists view, through imitative behaviour a particular management concept can become established, or taken for granted, regardless of whether there is any evidence that the technique indeed enhances efciency (Davis et al., 1994, p. 550). The process of institutionalization is self-reinforcing. Widespread adoption increases the legitimization of a concept, and legitimization ensures its acceptability and therefore further dissemination. Management fashion theory focuses on the managerial discourse that accompanies the institutionalization and de-institutionalization of management concepts. In the course of turning into a management fashion these concepts become an object of the broader discourse that is shaped by the public business press and management bestsellers (Kieser, 2002). Lean production (LP), business process reengineering (BPR), and total quality management (TQM) are well-known examples of management fashions. The lifecycle of these management fashions is typically characterized by a short-lived, bellshaped popularity curve (Gill and Whittle, 1992; Kieser, 1997). In the beginning, only a few pioneers adopt the trend. These pioneers are joined by more and more imitators. The growing number of followers justies adopting the new trend, which in turn attracts new followers. However, as the popularity of a management concept grows, it gradually ceases to appear progressive and its appeal decreases. The rst organizations begin to abandon the technique often in favour of a new fashion, a counter-bandwagon, until the old fashion is out and reaches the end of its lifecycle (Abrahamson and Rosenkopf, 1993, p. 489). Abrahamson (1996) proposed that the swings that are typical of management fashions are related to technical contradictions or managerial dilemmas within organizations. Each new management fashion stresses one side of a managerial dilemma, until the counter-bandwagon appears which focuses on the opposite side. Unlike management fads, which spread mainly through inter-organizational imitation, fashions are propelled to a large extent through management fashion-setters outside the organization. The rhetoric that such fashion-setters typically employ can convince fashion-followers that a certain management concept is both rational and progressive (Abrahamson, 1991; Kieser, 1997). The ideas and techniques of management fashionsetters appear to be simple and clear and promise enormous improvements quantum leaps in efciency. At the same time, they can often be ambiguous, vague, contradictory, and puzzling (Giroux, 2006). Concepts like core competencies or customer
166
orientation are not detailed recipes for inputs, processes or structures, they are metaphors transmitted via rhetoric (Cornelissen, 2006; Kieser, 1997). One reason why managers adopt popular management concepts is that these offer the opportunity to signal legitimacy and innovativeness, even when there is little theoretical or practical evidence that the implementation of the management technique will improve efciency (see e.g. OMahoney, 2007). For example, Staw and Epstein (2000) found that publicly listed companies which introduced a popular management approach were more admired, and perceived as more innovative, although this was not matched by higher economic performance. While the impact that scholarly research has on the popular management discourse has been the object of controversy (Hodgkinson and Rousseau, 2009; Kieser and Leiner, 2009), there is consensus that consultants, gurus, and the business press dominate the management fashion-setting community (David and Strang, 2006; Kieser, 1997). These fashion-setters not only sense and satiate incipient demand for new types of management fashions, but they also shape this demand by articulating for fashion followers that particular technique which matches the type they prefer (Abrahamson, 1996, p. 273). However, the role of another authority that can dene what good management is has so far been neglected in the literature: the capital market and its representatives, such as security analysts. What Wall Street wants has a high degree of inuence on what is regarded as an appropriate form of management practice, and in recent decades this inuence has grown (Brancato, 1997; Useem, 1996). For example, several corporate governance reforms were launched in the last two decades (e.g. Gillan and Starks, 2000; Karpoff et al., 1996), which increased transparency and shareholders opportunities to monitor and control managerial actions. Rappaports (1986) concept of shareholder value, which may have been a fashion in itself, spread rapidly during the 1990s (Dobbin and Zorn, 2005). Around that time, the Wall Street rule according to which shareholders accept a companys strategy or invest somewhere else lost its signicance (Nicolai and Thomas, 2004). A new phase of shareholder activism started and large shareholders in particular intervened in the processes of strategic decision-making. As a result, executives focused more intensely on meeting the explicit expectations of investors and analysts. The interaction between executives and capital-market actors has continued to grow, indicating that the latter have an increasing inuence on corporate decisions and can thus play an important role in the development and distribution of popular management concepts. Security analysts in particular are regarded as experts in examining a companys nancial structure as well as its strategic prospects (Moreton and Zenger, 2005; Zuckerman, 1999). This leads to the question of how the role of analysts can be integrated into a theory that explains the emergence and decline of management concepts. The Role of Security Analysts Security analysts are an important source of information on the valuation of rms for players in the stock market. They conduct independent research on the competitiveness and nancial situation of a company, interrogate top managers about potential problems, and elicit information on possible corrective measures (Rao and Sivakumar, 1999).
167
In that sense, security analysts are surrogate investors as their forecasts, when positive, increase demand for a rms shares (Zuckerman, 1999, p. 1408). Hence, managers often take part in meetings or conferences of analyst associations and watch closely the periodic reports of analysts who assess a rms nancial performance and issue buy, sell, or hold recommendations (Useem, 1996; Zuckerman, 2000). Analysts not only monitor the nancial reports of rms but also promote the adoption of certain management techniques. For example, Moreton and Zenger (2005) present empirical evidence that managers adopt common strategies and popular management concepts, rather than unique strategies, to attract more coverage by analysts and receive higher valuations. In order to explore the role of analysts in the evolution and spread of popular management concepts, we rst have to discuss how security analysts can be integrated into Abrahamsons concept of the management fashion-setting process (Abrahamson, 1991, 1996). To begin with, it is reasonable to suggest that analysts serve as mediators between the management fashion supply (e.g. consultancies, gurus, business schools) and the fashion demand (e.g. companies as consumers of management knowledge). Depending on the underlying theoretical assumptions, different expectations can be developed as to how the analysts role as a mediator inuences the diffusion of management concepts. One view (A) is that analysts serve as a corrective and inhibit faddish behaviour. This view is consistent with the efciency market hypothesis (Fama, 1970). Another view (B) is that analysts facilitate the spread of management concepts. According to this view, analysts are subject to similar socio-psychological forces as other followers of management fashions (e.g. Zuckerman, 2000). View A coincides with the efciency market hypothesis and assumes that prices faithfully reect all available information and that agents act rationally, using all available information on relevant matters to form an unbiased estimate of future dividends and earnings (Fama, 1970). In this view, analysts should be immune to business rhetoric, institutionalization processes, and the socio-psychological forces of management fashions since they base their valuations on purely rational criteria. Consequently, the primary role of analysts should be to impede the dissemination of management fashions. View B also accords considerable importance to analysts, as neo-institutionalists view professionals to have a signicant inuence on the development of organizational structures: Professionals are self-interested theorists who provide recipes for successful management, motivate public authorities to dictate or to provide incentives for approved forms, and generate rationales for organizations adoption of new models and practices. . . . As nascent professionals, nancial analysts induce corporate managers to respond to shareholders concerns and maximize shareholder value. (Rao and Sivakumar, 1999, p. 32) However, according to view B, analysts, like all individuals, are prone to errors, misinterpretations, social inuences, and personal biases. Indeed, as nancial assets are social goods, valuation is difcult (Zuckerman, 2000). Recent advances in nance theory suggest that the limited sense of efciency can be explained with the help of theories that
168
researchers call collectively behavioural nance (Kahneman and Tversky, 1973). Most empirical studies nd that forecasts are systematically upward biased, i.e. over-optimistic (for an overview, see e.g. Brown, 1993) and that there is a tendency among analysts to herd (e.g. DeBondt and Forbes, 1999; Welch, 2000). Herding can be understood as the propensity of analysts to ignore private information and orient their forecasts to those of other analysts. This leads to systematically wrong predictions, which are coupled with relatively low levels of forecast dispersion among the different analysts (Guedj and Bouchaud, 2005). Herding is a well-established social phenomenon, and occurs especially in response to uncertainty (Welch, 2000). Analysts fear that they might lose their job or reputation, or suffer some other retribution if they issue wrong forecasts. This pressure leads them to exhibit conformist behaviour by orienting their forecasts to those of other analysts (Phillips and Zuckerman, 2001) or following especially experienced or highly skilled analysts so called fashion leaders (Bikhchandani et al., 1998, p. 160). If analysts herd, i.e. display behaviour that imitates, or is in line with that of their peers, it is reasonable to suggest that they also display imitative behaviour that is aligned with that of the broader managerial discourse in other words, that they foster institutionalization processes or follow management fashions. Indeed, analysts are often blamed in the popular business literature for behaving fashionably. The new economy hype, for example, is often attributed to the overoptimistic forecasts of herding analysts (Stiglitz, 2003). In the context of Abrahamsons (1996) framework it could be said that analysts serve as facilitators between fashion supply and demand. If that is the case, analysts can contribute to the dissemination of management fashions by producing incentives for executives to adopt popular management concepts. Views A and B are not mutually exclusive. Indeed, Abrahamson (1996) emphasizes that the spread of management concepts is driven by technical-economic and sociopsychological forces. In a similar way, analysts may be both rational and inuenced by socio-psychological factors. However, the main point of interest in this analysis is not so much the degree of rationality but the question of whether analysts exhibit non-random, systematic deviations from rational expectations that can be explained by neoinstitutional and management fashion theory. To discuss this point empirically, we focus on one of the most inuential management fashions of the 1990s, the core competence concept and the corresponding refocusing trend. THE REFOCUSING TREND IN THE 1990s Davis et al. (1994) analysed the wave of conglomerate mergers that lasted from the 1960s to the early 1980s. During that period, companies in the USA and in Europe followed strategies of unrelated diversication that resulted in strongly diverse conglomerates. There were a number of reasons for this development: in the USA, for example, there was the CellerKefauver Act, which prohibited horizontal and vertical acquisitions. This meant that external growth had to occur through acquisitions in unrelated industries. Davis et al. (1994) also showed that as a result of this development, the conglomerate became an institutionalized form (Meyer and Rowan, 1977). Eventually, it was taken for granted that the conglomerate, or the rm-as-portfolio model, was the most modern and efcient organizational structure (Davis et al., 1994).
169
The popular management discourse supported this institutionalization process. In particular, the management fashion of portfolio matrices, as propagated by the Boston Consulting Group, McKinsey, and Arthur D. Little, proved inuential. In the USA, 45 per cent of the Fortune 500 companies applied portfolio techniques by the end of the 1970s (Haspeslagh, 1982). These techniques built upon the concept of strategic business units and were developed for the management of companies that exhibited unrelated diversication. These portfolio concepts implied that conglomerates were an efcient organizational structure. This perception changed dramatically in the 1980s. During the so-called raider wave, a large number of US companies became the targets of hostile takeovers and were broken up into individual business units (Bhagat et al., 1990). The mean degree of diversication decreased and the highly diversied company went out of fashion corporate conglomerates became de-institutionalized (Davis et al., 1994, p. 548). This trend was accompanied by a transformation in business rhetoric, which discredited the rm-as-portfolio model, particularly in the second half of the 1980s. Davis et al. (1994) write: No clear-cut alternative has arisen to replace the rm-as-portfolio-model, but broad outlines indicate that the logic dening what is appropriate to bring within a single organizational boundary has gone from being exceptionally broad (the conglomerate) to strikingly narrow. (Davis et al., 1994, p. 563) Prahalad and Hamels (1990) core competence concept and related approaches can be seen as such alternatives to the rm-as-portfolio model that Davis et al. (1994) were not yet able to discern at the beginning of the 1990s. As mentioned earlier, management fashions often arise as a counter-bandwagon to a previously predominant business rhetoric (Abrahamson and Rosenkopf, 1993). Prahalad and Hamels (1990) core competence concept is deemed to be a classic example of a management fashion (Carson et al., 2000). The central message is that companies should develop strategy and structure around their core competencies. They should strive for competence leadership (Carson et al., 2000, p. 84) rather than product leadership and should abandon the tyranny (Carson et al., 2000, p. 86) of product-oriented strategic business units. Over the 1990s, the core competence approach developed into one of the most inuential management concepts (Rigby and Bilodeau, 2007), and Prahalad and Hamel rapidly advanced to the status of management gurus. Prahalad and Hamels (1990) somewhat ambiguous argumentation does not necessarily demand for a reduction of market segments and corporate diversication. However, management fashions are often implemented in a simplied and modied way (Benders and van Veen, 2001). This applies also to the core competence concept, which is often used in practice as a means of justifying de-diversication. The business press generally uses the term core competence as a synonym for focusing on core activities. Managers do the same, and even in the academic discourse the core competence concept is regarded as evidence for the efciency-increasing effect of de-diversication (e.g. Deutsch, 1997; Varadarajan et al., 2001; Zuckerman, 2000). Kanter (1991) used similar terminology in the early 1990s to describe the new ideal of the focused business, which follows the imperative of maximizing the core business competence. Anecdotal
170
evidence from the business press suggests that Wall Street also valued the benets of refocusing: The . . . new management fashion is to focus on your core competencies: the things that you and you alone can do better than anyone else. J. P. Morgan, an investment bank, has constructed an index measuring a companys focus on a scale of 1100. American companies that decided to clarify their business (jargon breeds jargon) by focusing on the one thing they did best outperformed the market by 11 per cent in the next two years; rms that diversied underperformed by about 4 per cent. (The Economist, 1996, p. 67) In a similar vein, many analysts exerted pressure on diversied companies to refocus (Useem, 1996). Typical examples are: Disney has been under pressure recently from Wall Street to sell nonstrategic assets and revive its core business (The New York Times, 1999, p. C1); How well the rm [MailWell] rebounds will depend on whether it can sell label and printed ofce-product businesses and concentrate on its core business, said Michael Plancey, an analyst with Merrill Lynch Global Security (The Denver Post, 2001, p. K1). In order to illustrate the lifecycle of the discourse on core competence or core business (see Figure 1) we used a bibliometric approach (e.g. Abrahamson and Fairchild, 1999). To measure the extent of the discourse, we counted the number of articles published on the subject of core competence in the ABI/Inform database from 1990 to 2002 (for limitations of this method, see Benders et al., 2007). We chose ABI/Inform, because the database is one of the most comprehensive business databases and focuses mainly on
1200
1000
No. of articles (adj.)
800
600
400
200
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year Core business Core competence
Figure 1. Adjusted numbers of articles on core competence and core business

171
business press and scholarly journals on management. First, we searched electronically all articles contained in the ABI/Inform database, looking for the word strings core competence, core competency, core competences, or core competencies in the body text of each article. In addition, we counted separately the number of articles listed under core business as the term is used by the business press and managers as a synonym for core competence (Nicolai and Dautwitz, 2009). Then, to correct for the overall growth of the total number of articles in the database, we applied the approach of Abrahamson and Fairchild (1999) and adjusted the number of articles by multiplying the number of core competence articles by the ratio of the total number of articles indexed in the year 1990 to the total number of articles in that specic year. Figure 1 shows that the core competence discourse had passed the zenith of its popularity by the end of the 1990s. This became apparent not only quantitatively but also qualitatively. Since 2000, business rhetoric has changed yet again. For example, leading consulting rms such as McKinsey or the Boston Consulting Group see again a trend towards diversication. As recently as 2002, McKinsey consultants asked are you too focused? (Harper and Viguerie, 2002); likewise, the Boston Consulting Group called for an end to the myth of focusing (Heuskel, 2002). Since 2000, the fashion of core competence orientation and the importance of refocusing has lost its popularity. HYPOTHESES The management fashion approach is based on the assumption that managerial discourse has an inuence on the dissemination of management concepts. Therefore, we expect the refocusing trend to follow the pattern of the popularity of the core competence discourse, which had its peak in the late 1990s. It should be noted, however, that the refocusing trend can also be explained by traditional nance theory. Agency theorists argue that conglomerates are the classic example of the agency problem ( Jensen and Meckling, 1976). Although there are mixed empirical results concerning the diversicationperformance relationship (Berger and Ofek, 1995; Datta et al., 1991; Hadlock et al., 2001; Servaes, 1996), many nance theorists question the benets of diversication, and the link between diversication and value destruction is made in virtually every nance text (Martin and Sayrak, 2003, p. 38). While diversication may not be in the shareholders interest, there are incentives for salaried managers to increase a companys product range. Growth through diversication increases their job security, income, and status (Amihud and Lev, 1981; Baumol, 1967). A series of developments in the capital market over the last 20 years is likely to have helped reduce the agency problem. These include the stronger disciplining effect of the market for corporate control, the growing importance of active institutional investors, and the increasing concentration of ownership and diverse corporate governance reforms (e.g. Jensen, 1993; Useem, 1996). From the point of view of agency theorists, such events reduce the chances of top-management behaving opportunistically and increase the pressure to correct over-diversication (e.g. Berger and Ofek, 1999; Hoskisson et al., 2005). Therewith, agency theorists offer an elaborate explanation for the refocusing trend. While both management fashion theory and agency theory help to explain why analysts supported refocusing strategies in the 1990s, they lead to fundamentally different
172
expectations with regard to the direction that the bias of analysts forecasts take. If we follow the fashion theory and assume that analysts are part of the management fashion community, we can infer that the management discourse should inuence their mental models and consequently their forecasts. This means that we expect analysts not to be immune to fashionable management concepts. As discussed above, analysts are prone to personal biases and imitative behaviour (view B). If analysts follow fashions this can be expected to have an inuence on the accuracy of their forecasts and, more signicantly, on the direction in which they are likely to err. Abrahamson (1996, p. 274) proposed that the popularity of a management concept is related to technical contradictions or managerial dilemmas within organizations. Management fashions stress one side of a managerial dilemma, causing receptivity for management concepts that stress the other side. This enables the emergence of a counter-bandwagon and explains the dynamics of pendulum swings that are typical of management fashions (Abrahamson, 1996). The diversication versus refocus question resembles such a dilemma. There are many good reasons for diversifying (e.g. market power, synergies, etc) as there are many good reasons for focusing (e.g. specialization advantages) (Datta et al., 1991; Markides, 1996). In particular, changes in federal antitrust policy (e.g. CellerKefauver Act) and in tax policy, as well as recent increases in competition, as a result of globalization, have generated trends that support or prevent the conglomerate form (Davis et al., 1994; Zuckerman, 2000). In addition, the original aim of risk reduction via diversication was replaced by the perception that such diversication is more efciently accomplished in public capital markets (Amihud and Lev, 1981). Stating that analysts follow management fashions does not imply that they simply ignore those good reasons and are instead exclusively inuenced by socio-psychological forces: a management fashion inuences the interpretative process by which those reasons and counter-reasons are balanced. When the dissemination of a management concept gains momentum we expect the virtues of one side of a managerial dilemma to be overvalued. Thus, unlike traditional approaches in nance, the management fashion approach can explain systematic forecast errors that are not in the analysts interest (view B). Since the core competence discourse associates refocusing strategies with progressiveness and efciency we can argue that in the 1990s analysts overestimated the benets of refocusing and underestimated the benets of diversication strategies. And as evidence indicates that analysts underreact to negative information, but overreact to positive information (Easterwood and Nutt, 1999, p. 1777), we expect the following outcomes: Hypothesis 1a: Refocusing activities were associated with a systematic overvaluation of future earnings by security analysts during the 1990s. Hypothesis 1b: Diversifying activities were associated with a systematic undervaluation of future earnings by security analysts during the 1990s. According to traditional approaches in nance, the errors of analyst forecasts should be time-independent. However, in light of management fashion theory, history matters. Management fashions pass through different stages throughout their lifecycles
173
(Abrahamson, 1991, 1996). With the growing diffusion of management concepts their legitimacy increases (Kieser, 1997). When it reaches the peak, a fashion is at its most persuasive. Therefore, one can assume that with the further dissemination of a concept, and as it gains momentum its positive inuence on the analysts forecasts increases because its legitimacy increases. The decline of the popularity of a management concept starts when it is no longer perceived to be progressive and modern and instead becomes the object of increasing criticism. At that point, the diffusion rate and the impact of the fashion start to decrease. The concept is worn out and management fashion-setters denounce the fashion and propagate a new one (Kieser, 1997). On the basis of the above, we can therefore state: Hypothesis 2: The popularity of the core competence discourse is positively associated with the overvaluation of refocusing rms by security analysts. METHODOLOGY Data Sources and Sample Selection We obtained data from three different sources for the period 19902002. Data on US rms and segment data were drawn from the Compustat North America database and the Compustat Industry Segment (CIS) database. To search systematically for refocusing and diversifying rms we gathered segment data. A popular source for this information is the CIS database. This database is compiled from corporate annual reports and 10-K reports to the Security Exchange Commission (SEC). According to FASB No. 14 and SEC Regulations S-K, US-based rms are required to report segment information for segments whose sales, assets, or prots exceed 10 per cent of the total amount. In line with other studies (e.g. Berger and Ofek, 1999), we used the CIS database, which reports segment information for all active Compustat rms. Analyst forecasts were obtained from the Institutional Brokers Estimate System (I/B/E/S). The analysis of our hypotheses requires the identication of a sample that includes refocusing and diversifying rms. We combined two measures to operationalize refocusing and diversifying activities: the change in the number of reported business segments measured on the four-digit SIC level (e.g. Chang, 1996; John and Ofek, 1995) and the entropy measure of diversication, proposed by Jacquemin and Berry (1979), which has been widely used in strategy research (e.g. Chang and Hong, 2000; Hill et al., 1992). The entropy measure is best suited to measuring continuous changes in diversication and has good convergent and discriminant validity with categorical measures (Chatterjee and Blocher, 1992; Chatterjee and Singh, 1999). This method allowed us to capture a companys entry or exit into a new business segment (on the four-digit level) and to ensure that this activity had a signicant impact on the overall diversication degree of the company. We identied the sample using multi-level screening: rst, we computed the number of reported segments and the entropy measure of diversication for all the rms in the CIS database. The total diversication measure was calculated across n business segments as the sum of a rms proportion of sales Pi made in each segment i and weighted by the logarithm of the inverse of its share (Palepu, 1985):
174
total diversification = Pi ln (1 Pi ).
i =1
(1)
Industry segments are dened at the four-digit SIC level. Unlike other diversication measures, the entropy index considers not only the number and the relative importance of the segments in which a rm operates, but also the degree of relatedness among the various segments. Therefore, total diversication can be decomposed into a related element and an unrelated element. Related diversication captures the distribution of sales by business segments within an industry group, while unrelated diversication captures distribution across industry groups. Hence, it is assumed that the business segments can be aggregated into m industry groups. The segments across groups are expected to be less related to one another than within groups. Then, the unrelated diversication is calculated in the same manner as the total diversication, except that here we dene Pj as the proportion of sales in industry group j and calculate it at the two-digit SIC level:
unrelated diversification = P j ln (1 P j ).
j =1
(2)
We supposed that diversifying companies should denote a signicant increase in their unrelated diversication, while refocusing rms should denote a signicant decrease. Hence, we dened as refocusing rms all companies which reported a decrease in the number of segments measured on the four-digit SIC level over a specic period and also a decrease in their unrelated diversication of at least 0.3 between the same years. In using this denition we followed Berger and Ofek (1999), except that we replaced the Herndahl index with a more rigorous measure of unrelated diversication. This procedure resulted in a sample of 1040 refocusing observations. We identied diversifying rms in an analogous manner: a rm diversies its business if the number of segments rises and the unrelated diversication increases by 0.3. In our study, this resulted in 1408 diversifying rms. In accordance with other studies, our second step was to restrict the analysis to manufacturing rms (e.g. Chang, 1996; Chatterjee and Singh, 1999; Grant et al., 1988), which form by far the biggest proportion of industries in our sample. That reduced the number of observations to 452 refocusing and 593 diversifying rms. Concentrating on manufacturing rms helps to pursue comparisons of corporate diversity and accounting measures. The accounting conventions used by banks, insurance, and oil companies differ from those employed by manufacturing rms. Moreover, we found matching pairs for most manufacturing rms, unlike in other industries. Our empirical methodology requires comparisons of analysts valuations of refocusing and diversifying rms to valuations of rms with no M&A activity. Accordingly, we constructed a matched control sample with rms of similar size and complexity. Following Berger and Ofek (1999), we used a matched-control rm for each diversifying or refocusing company. For a matched control to qualify as such, the following two requirements had to be fullled: rst, the observation had to be made in the same year for both

Table I. Comparison of descriptive statistics between strategy and control samples Strategy sample n = 138 Total diversication Mean Std. dev. Median Total sales Mean Std. dev. Median Control sample n = 138 Difference (t-statistic)
175
0.75 0.32 0.68 4591.88 9448.24 1356.96
0.74 0.30 0.68 3091.06 5487.30 1361.80
0.01 (-0.33)
1500.82 (-1.61)
the matched-control and the refocusing or diversifying rm, but should not exhibit any changes in the number of reported segments. Second, the matched rm should be of similar size and complexity as the refocusing or diversifying rm. Accordingly, we identied for each diversifying and each refocusing rm all companies with a maximum deviation of sales and total diversication of 70 per cent. This resulted in multiple matches. We selected the match that had the smallest deviation in the diversication degree and in sales, the diversication degree being the dominant criterion (e.g. Hyland and Diltz, 2002). Finally, we had to eliminate from the sample those rms for which forecasts and accounting data were not available. This led to a sample of 276 companies, 34 of which implemented a refocusing strategy, 104 implemented a diversifying strategy, and the remaining 138 were control rms. The main reason for the reduction of the sample size was the availability of forecast data. Table I shows the sales and diversication variables for the strategy sample (refocus and diversify) and the matched-control sample. The average diversication degree is roughly the same while the average size measured by sales is slightly different. This small deviation can be attributed to the dominance of the diversication criterion. Furthermore, a mean difference test shows that differences between the samples are not signicant. We can conclude that our matched-control sample qualies as such. Table II indicates that the corporate refocusing and diversifying programmes represent substantial restructurings. It presents the unrelated diversication and the number of segments before as well as after the implementation of the strategy. The results show that the mean number of reported segments dropped from 4.41 to 2.85 for the refocusing rms and doubled for the diversifying rms while the mean unrelated diversication dropped from 0.41 to 0.38 for refocusing rms and increased from 0.01 to 0.68 for diversifying rms. To test Hypothesis 2 we had to generate a different sample. As we wished to analyse the inuence of the management fashion discourse on analyst valuations of refocusing rms, we had to concentrate solely on refocusing rms. Therefore, we used the original refocusing sample of 1040 rms. From these we eliminated those rms for which we did
176
Table II. Firm diversication levels before and after refocusing or diversication Variable Refocusing rms Before refocusing (t-1) Unrelated diversication Mean Std. dev. Median Number of segments Mean Std. dev. Median After refocusing (t) Diversifying rms Before diversication (t-1) After diversication (t)
0.41 0.50 0.48 4.41 1.96 4.00
0.38 0.30 0.00 2.85 1.11 2.00
0.01 0.10 0.00 1.59 1.20 1.00
0.68 0.26 0.63 3.69 2.05 3.00
not have forecasts and accounting data. This led to a smaller sample of 74 refocusing rms that is analysed by means of regression techniques in the following section. Variables One of the main objectives of our empirical analyses was to assess whether refocusing rms were overvalued by security analysts while diversifying rms were undervalued (Hypotheses 1a and 1b). To test these hypotheses we estimated the parameters of the following econometric Model I:
analyst surpriseit = a0 + b1refocusing it + b2diversifying it + b3 forecast dispersion it + b4 firm sizeit + b5 leverageit + b6time effectt + e it . (3)
The dependent variable is the mean relative forecast error denoted as analyst surprise, which is based on the absolute value of the difference between the rms forecasted and actual earnings, divided by the actual earnings:
analyst surpriseit =
ijt x it + h 1 J x J j =1 x it + h
(4)
ijt is the j-th analyst forecast issued at time t over the horizon h of the i-th rms where x earnings-per-share and xit+h is the actual value at t + h. The analyst surprise for rm i for period t can take positive as well as negative values. Positive values indicate an overestimation of the actual earnings-per-share and negative values an underestimation. Since analyst forecasts are estimates, the realized analyst surprise will mostly differ from zero. We restricted the forecast data to a forecast horizon of roughly three years. This we did for two reasons: rst, we wanted to eliminate the inuence of the forecast horizon on the
177
accuracy of prognoses, taking into account that a shorter horizon leads to more accurate forecasts; and second, it is appropriate that analysts should value the rm strategically by giving long-term predictions. Additionally, we restricted the analyst surprise to the interval [-1; 4] to adjust for outliers. This skewed interval is due to the skewed distribution. Among the independent variables, the main variables of interest are the refocusing and the diversifying ones. Both are dummy variables, and are set to 1 if the company is refocusing or diversifying, and set to 0 otherwise. The dummy variables of companies in the control sample take a zero value in both cases. Other attributes that could inuence analyst surprise are rm and forecast characteristics, and year-related effects (e.g. Garca-Meca and Snchez-Ballesta, 2006). The rst variable that we include here is forecast dispersion. Previous studies indicate that forecast dispersion is negatively related to analysts forecast errors (Lang and Lundholm, 1996). The dispersion is often used as a proxy for uncertainty and a lack of consensus among analysts about future earnings (Barron et al., 1998). For each rm, forecast dispersion is measured by the standard deviation of forecasts. We assume a positive association. Second, we controlled for rm size, which is one of the most common variables studied in research on forecast errors (e.g. Duru and Reeb, 2002; Gu and Wu, 2003). In most studies, it is found to be negatively associated with analyst forecast error, although it potentially has two different, and opposite, effects (Garca-Meca and Snchez-Ballesta, 2006): larger rms are more complex and thus indicate a greater forecast error; on the other hand, more predisclosure information is available for such rms, which may actually lead to a lower forecast error. We quantied rm size by the logarithm of the total assets, expecting the coefcient of size to be negative (e.g. Beckers et al., 2004; Brown, 1997). Third, following Zhang (2006), we suggested that leverage is positively related to analyst surprise. Leverage is measured by the debt-to-total-assets ratio and can capture the degree of nancial distress. A higher ratio indicates a possible overuse of leverage, and consequently potential problems with meeting debt payments. In such a high-risk environment, analyst forecasts tend to overestimate future earnings. Additionally, we also controlled for year-specic effects using a set of time dummy variables as the degree of forecasting difculties varies across time periods (e.g. Duru and Reeb, 2002). Subsequently, we wanted to test whether analysts, who cover refocusing rms, are directly inuenced by the core competence discourse. To check this hypothesis (Hypothesis 2) we estimated the parameters of the following modied econometric Model II:
analyst surpriseit = a 0 + b1fashion discourset + b2 forecast dispersion it + b3 firm sizeit + b4 leverageit + e it .
(5)
The strategy variables were removed as we examined only refocusing rms. Instead, in (5) we included a fashion discourse variable, which represents the core competence discourse during the period. The discourse was quantied using a bibliometric approach (Abrahamson and Fairchild, 1999). We measured the extent of the discourse by counting the number of articles listed under core competence, core competency, core compe 2009 Blackwell Publishing Ltd and Society for the Advancement of Management Studies
178
tences, or core competencies in the ABI/Inform database from 1990 to 2002 and adjusted that number for database growth. We expected that the discourse would be positively associated with analyst surprise. EMPIRICAL RESULTS AND DISCUSSION Descriptive Statistics The calculation of the entropy measure of total diversication for all US rms in the database during the 1990s shows a noticeable decline of the average diversication degree until 1997. While total diversication was 0.16 in 1990, it has been in constant decline ever since. In 1997 total diversication was decreased to 0.11. If one restricts the sample to companies with minimum sales of at least $100 million this trend becomes even more obvious (see Figure 2). Total diversication decreased from 0.28 in 1990 to 0.18 in 1997. This trend is mainly due to the decline of unrelated diversication, indicating that during that period a signicant proportion of business segments that were not part of the core business was eliminated. Moreover, the overall refocusing trend in the beginning of the 1990s was replaced by a diversication trend in the late 1990s. One can conclude from the data that this refocusing wave followed the pattern of the core competence discourse during the same period. Table III summarizes various descriptive statistics of different variables for the three sample groups: refocusing, diversifying, and control rms. Additionally, we tested for
Figure 2. Development of total diversication (DT), related diversication (DR), and unrelated diversication (DU) of US Firms, 19902002 (sales > $100 million)
179
Table III. Descriptive statistics of the dependent and independent variables and mean difference tests between refocusing and diversifying rms during the 19902002 period Variable Refocusing rms (n = 34) Diversifying rms (n = 104) Differences between refocusing and diversifying rmsa Control rms (n = 138)
Analyst surprise Mean Std. dev. Median Total diversication Mean Std. dev. Median Unrelated diversication Mean Std. dev. Median Forecast dispersion Mean Std. dev. Median Number of analysts Mean Std. dev Median Firm size (total assets) Mean Std. dev. Median Leverage Mean Std. dev. Median
0.72 0.98 0.37 0.64 0.28 0.65 0.38 0.30 0.48 0.22 0.27 0.14 5.59 5.69 4.00 7.98 1.40 8.32 0.27 0.18 0.27
0.67 0.96 0.27 0.79 0.33 0.69 0.68 0.26 0.63 0.13 0.17 0.05 4.60 6.46 2.00 6.84 1.79 6.80 0.26 0.17 0.26
0.05 (0.26) 0.10 (0.44) -0.14* (-2.29) -0.04 (-1.89) -0.29*** (-5.52) -0.15*** (-3.86) 0.09* (2.39) 0.09* (2.04) 0.99 (0.80) 2.00 (1.75) 1.14*** (3.29) 1.51*** (3.37) 0.00 (0.12) 0.01 (0.14)
0.54 0.93 0.19 0.74 0.30 0.68 0.44 0.35 0.53 0.19 0.41 0.48 3.85 4.89 2.00 6.78 1.77 7.00 0.25 0.18 0.24
Notes: a t-statistics and z-scores in parentheses. * p < 0.10; ** p < 0.05; *** p < 0.01.
differences between refocusing rms and diversifying rms. Here, we report the t-statistics and the Wilcoxon rank sum statistics for the mean and median difference signicance tests between refocusing and diversifying rms. The calculations show that analysts generally overestimated future corporate earnings, as the mean of analyst surprise is positive in all cases. This nding is consistent with most empirical studies, indicating a tendency towards over-optimistic behaviour among analysts (for an overview, see e.g. Brown, 1993). An even more interesting point is that analysts overestimated the earnings of refocusing rms by 72 per cent on average and of diversifying rms by 67 per cent, but those of the control sample only by 54 per cent. This discrepancy of 5 percentage points between refocusing rms and diversifying rms,
180
Table IV. Correlation coefcients matrix (Pearson) for the dependent and independent variables 1. 1. 2. 3. 4. 5. 6. 7. 8. Analyst surprise Refocusing Diversifying Forecast dispersion Number of analysts Firm size Leverage Fashion discourse 2. 3. 4. 5. 6. 7.
0.04 0.05 0.07 -0.09 -0.19*** 0.09* 0.11
-0.29*** 0.06 0.08 0.22*** 0.02 -0.07
-0.10* 0.04 -0.05 0.03 0.04
0.36*** 0.27*** 0.06 0.25***
0.40*** 0.02 0.03
0.21*** 0.19***
-0.08
Notes: * p < 0.10; ** p < 0.05; *** p < 0.01.
as well as the discrepancy of nearly 20 percentage points between the refocusing and control samples, gives a rst hint that refocusing is probably associated with systematic overvaluation by analysts. An equally noteworthy nding is that the average values of the control variables indicate the following relationships. First, refocusing rms are signicantly larger than diversifying rms. The differences in mean and median are statistically signicant at the 1 per cent level. Second, refocusing rms are covered on average by more analysts than diversifying rms. Third, on average, forecast dispersion among refocusing rms is higher than among diversifying rms, suggesting a higher level of uncertainty and lack of consensus among analysts covering refocusing rms. The values for the control sample exhibit no noticeable deviation from the two main samples. Only the lower numbers of analysts and total assets indicate that rm size is as already mentioned somewhat smaller. Table IV presents a Pearson correlation matrix for the independent and dependent variables of the whole sample. We found that refocusing and diversifying strategies are associated with higher analyst surprise and that rm size is negatively associated with analyst surprise. Moreover, analysts tend to issue more optimistic forecasts for rms with a higher debt-to-assets ratio. The correlations also show that there will be no serious problem with multicollinearity in the regression analyses. Quantitative Results We estimated the parameters of the econometric Models I and II using maximum likelihood estimation (MLE) techniques. To take into account the effect of left and right truncation of the dependent variable, we applied the Truncated Regression Model as suggested by Greene (2003, p. 760). OLS would here produce biased and inconsistent results (Davidson and MacKinnon, 1993). We ran a BreuschPagan test to check for heteroscedasticity. The null hypotheses of homoscedasticity could be rejected in all cases at a 0.01 signicance level. Table V displays the estimated coefcients of the maximum likelihood regression and the reported Wald z-tests in which robust White standard
181
Table V. Regression of the analyst surprise on the hypothesized variables, after controlling for other determinants: results of the maximum likelihood estimation (truncated regression model) Model I Coefcient Intercept Hypothesized variables Refocusing Diversifying Fashion discourse Control variables Forecast dispersion Firm size Leverage Year effect Number of observations Wald chi-squared Log pseudo-likelihood Standard error of estimate 1.45*** 0.66*** 0.16 Wald z-score 3.04 2.54 1.05 2.24* 0.44 -0.24*** 1.10*** Yesa 276 36.99*** -336.67 1.04 1.55 -4.35 2.55 0.74** -0.26*** -0.62 74 10.60** -96.93 1.11 1.80 2.17 -2.56 0.55 Coefcient 2.00*** Model II Wald z-score 2.66
Notes: a Coefcients are jointly signicant (chi-squared = 20.18) at the 0.05 level. * p < 0.10; ** p < 0.05; *** p < 0.01.
errors (White, 1980) were used to take into account heteroscedasticity. The chi-squared tests show that the models are statistically signicant in both cases. The rst column of Table V shows the results of estimating Model I. The main variables of interest in the reported regression results demonstrate the hypothesized effect. The coefcient of the refocusing variable is positive (b1 = 0.66) and signicant at the 5 per cent level, indicating that analysts systematically overvalued the future earnings of refocusing rms. On the basis of these results, we nd that our Hypothesis 1a is conrmed: security analysts overvalued refocusing activities during the 19902002 period. This result supports our proposition that analysts indeed take corporate strategies into consideration in their rm valuations, and that during that particular period they had a positive attitude towards refocusing activities. The coefcient of the diversication dummy does not differ signicantly from zero, implying that analysts did not systematically underestimate the future earnings of diversifying rms during the 1990s. This means that Hypothesis 1b has to be rejected. Nevertheless, we can conclude from these results: (1) that, as a matter of principle, analysts did not differentiate between diversifying rms and rms that did not show M&A activity during that period; and (2) that a counter-movement (a refocusing trend after the diversication trend) does not inevitably lead to the underestimation of the original strategy (diversication). Regarding the control variables, the estimated coefcients of Model I are with the exception of forecast dispersion signicantly different from zero: rm size has a negative impact on analyst surprise (b4 = -0.24, p < 0.01), indicating that larger rms are
182
more transparent to observers and likely to gain greater access to private information. This nding is consistent with most empirical studies (for an overview, see e.g. GarcaMeca and Snchez-Ballesta, 2006). The signicantly positive inuence of leverage (b5 = 1.10, p < 0.01) can also be explained. A higher debt-to-assets ratio may indicate future problems with meeting debt payments: analysts tend to issue more optimistic forecasts when uncertainty regarding future earnings increases, which is also conrmed in several empirical studies. Model II introduces the inuence of the core competence discourse on the analyst surprise of refocusing rms. The results of our estimation are reported in the second column of Table V. We nd evidence that the discourse variable is positively associated with analyst surprise at the 10 per cent level (b1 = 2.24). Thus, we nd our Hypothesis 2 conrmed: the popularity of the core competence discourse is positively associated with the overvaluation of refocusing rms by analysts. This result suggests that analysts covering refocusing rms were likely to be inuenced by the core competence discourse during the 1990s. Consequently, we can assume that analysts play an important role in the management fashion-setting process, although we cannot directly derive from these results what role they play, i.e. whether analysts act as originators, facilitators, or mediators of such a fashion. Regarding the control variables in this model, the coefcient estimates differ signicantly from zero, with the exception of the leverage variable. We nd that higher forecast dispersion (b2 = 0.74, p < 0.05) is associated with a higher overestimation of future earnings. Limitations A weakness of this study is the denition of refocusing and diversifying measures, as these are dependent on the use of the SIC-based entropy measure. The main disadvantages of this measure are as follows. First, the entropy measure is based on the SIC system. Unfortunately, the distance between SIC numbers cannot be interpreted as a measure of relation (Montgomery, 1982). Although four-digit categories within broader two-digit groups could be expected to be more similar than four-digit categories from different two-digit groups, one cannot interpret numerical differences on an interval or ratio scale. Thus, there arises the problem that segment groups, which are normally highly related, are separated by the SIC system. Second, the extent of diversication in segment nancial reporting is smaller than the true extent of diversication, which is due to the fact that segment reporting requires only segments with a sales proportion of at least 10 per cent. This reporting convention results in a total maximum of ten reported segments. Third, as segments are self-reported, the denition of a segment is exible. Firms can combine two or more vertically related activities into one segment or change segments without changing their operations (Martin and Sayrak, 2003). Because of the described problems with the SIC-based diversication measure, we ran qualitative checks on the refocusing and diversifying rms, in addition to the quantitative analysis by two independent coders. As part of those checks, we searched the LexisNexis database using the following strings: name of company, years of transaction, core business, and refocus in the case of a refocusing measure, and diversify in the case of
183
a diversication measure. The strategy was conrmed by means of a randomly chosen sub-sample in 70 per cent of the cases of refocusing rms and 50 per cent of the cases of diversifying rms. We did not nd any counter-evidence that the remaining 30 per cent of the refocusing rms were actually not refocusing. We also found no counter-evidence in roughly 30 per cent of diversifying rms, which indicates that our measure is reliable in spite of the aforementioned weaknesses. Moreover, these additional qualitative tests showed that diversifying measures often indicated a vertical or horizontal integration and thus a related diversication or an extension of the core business, rather than a classic diversication with unrelated product lines. This result is possibly one of the reasons why Hypothesis 1b was not conrmed: namely, that the future earnings of diversifying rms were not underestimated. Although our ndings show that the capital market fostered the core competence fashion, they still fall short of specifying the exact causal inuences within the management fashion-setting community. Some of our ndings support the view that the capital market not only disseminates but also co-produces fashions. In the 1980s managers faced pressure from security analysts and investors to de-diversify even before the core competency fashion appeared. This was due to different reasons, which were largely independent of the broader managerial discourse. Generally, the opinion that investors, rather than companies, should diversify was held by many nancial market professionals at that time and is also supported by the standard nancial textbooks (e.g. Brealey et al., 2006). In the United States, during the raider wave, conglomerates became the target of hostile takeovers. One important reason for that development was the emergence of new forms of nancing (such as junk bonds), which, however, were not accompanied by new management techniques. Zuckerman (2000) puts forward another argument why analysts favoured focused companies early on: security analysts tend to specialize in particular industries. Diversied companies with business lines in several industries are not easily understood, which hinders attempts to value their shares. As a result, analysts give diversied companies a poorer valuation, which means that the managers of such rms face pressure to refocus so that their stock can be more easily appraised. Given that the valuations and opinions of the relevant nancial market professionals preceded the described shift in business rhetoric, it is reasonable to suggest that a reciprocal relationship exists between the two: analysts inuence the popular managerial discourse and the discourse inuences the valuations of analysts. If consultants or management gurus take up ideas that are already in the air, they are not, as past research has suggested, the sole or main originators of management fashions. CONCLUSION AND IMPLICATIONS To date, the academic debate on the diffusion of management concepts has not put much emphasis on the role of capital market actors. It has focused primarily on the role of management consultants and gurus as originators of management fashions. This study tries to bridge this gap and sheds light on the inuence of security analysts on the evolution and spread of popular management ideas. Our analyses of the core competence concept show, that in the period covered by this study, analysts overestimated the
184
future earnings of refocusing rms and that their valuations were positively inuenced by the managerial discourse during the same time. These ndings suggest that security analysts indeed play an important role in the dissemination of popular management concepts and can even act as facilitators or co-producers of such trends. In that respect, our study extends management-fashion theory in various ways. We show that professional observers of the capital market, such as analysts, are an important part of the management-fashion community. Thus, contrary to the purely rational view, it is unlikely that the capital market serves as a corrective mechanism that limits the dissemination of popular management concepts with unclear performance implications. Previous studies have analysed how technical (market) pressures contribute to the de-institutionalization of organizational forms or to fashion downswings (e.g. Davis et al., 1994). However, our analysis suggests that it is exactly the qualied, unemotional, i.e. non-faddish, reasoning that enables capital market actors to dene appropriate behaviour and contributes to the institutionalization of new practices. This nding leads to the proposition that capital-market-oriented companies may be more susceptible to popular management concepts than, for example, family-business rms. In the last three decades family-owned companies like Tata in India, Haniel in Germany, or Loews in the USA stayed relatively unaffected by the popular management discourse and have been following diversifying strategies. Moreover, our ndings help to resolve the classic neo-institutionalist question of why management practices spread even when they may be inefcient. As it emerges from our study, nancial analysts play a special role in institutionalization processes (see Figure 3). Not only can they induce publicly listed corporations to adopt institutionalized practices (Rao and Sivakumar, 1999) but they also increase stock market valuations (e.g. DeBondt and Thaler, 1990; Lys and Sohn, 1990), which in turn are used to evaluate the efciency of popular management concepts. In other words, performance data, such as stock market returns, may be subject to the same bandwagon pressures as the management concepts under investigation (ONeill et al., 1998). Positive stock market reactions, however, have a direct effect on qualitative reasoning about what constitutes norms of good management in the broader managerial discourse that surrounds the process of institutionalization. This effect enhances signicantly the
Figure 3. The role of security analysts in the institutionalization process of new management concepts (MC)
185
acceptability of a management concept and introduces a second source of legitimacy to the neo-institutional literature, which has hitherto not been discussed. Neoinstitutionalists focus on the widespread adoption of a concept via inter-organizational imitation, which serves as a source of legitimacy (DiMaggio and Powell, 1983). By contrast, our study highlights the legitimacy-enhancing effect of performance data and the mediating role of capital markets in the adoption and popularization of management concepts. Another implication of our ndings is that analysts can mislead top managers into overestimating the virtues of popular strategies. It should be noted that fund managers, rating agencies, investment banks, and analysts have a strong and increasing inuence on corporate strategy and structure, and managers are subject to growing pressure from shareholders and their representatives to apply strategies that have become established as legitimate solutions to managerial problems. These groups monitor managers, aiming to force them into the path of shareholder-value maximization and to impede deviant managerial actions (Marris and Mueller, 1980). Deviations from this strategic direction are primarily interpreted as a conict of interests between shareholders and salaried managers. However, an optimal strategic path is not exogenously given, but emerges in the course of a sense-making process within the managerial discourse. Against the backdrop of our ndings, the question arises whether the capital market impedes suboptimal managerial actions, or rather, deviant behaviour in general. Indeed, homogenization processes of corporate strategies are often attributed to the inuence of the capital market (Fligstein, 1990). This effect promotes faddish behaviour and restricts a managers chances of pursuing unique strategies. As corporate strategies become ever more homogenous because of imitative behaviour, competitive advantages are in increasing danger of becoming eroded. Whereas agency theorists stress the benets of tighter control over management, our analysis, which is based on fashion theory, highlights also the possible disadvantage of the capital markets increasing inuence on corporate strategy and structure. Nevertheless, one cannot deduce from our study that managers should ignore the demands of security analysts and other nancial market actors. If they ignored these demands, they would run the risk of damaging corporate reputation. As mentioned earlier, Staw and Epstein (2000) have shown that analysts and external executives attribute a higher reputation to rms that adopt widely accepted management techniques, although adopting such techniques is not necessarily associated with higher rm performance. However, there are various possible ways of responding to institutional pressures to adopt management concepts. As Oliver (1991) states, managers could choose from among various possible strategic responses to institutional pressure, which range from passive conformity to proactive manipulation. One possibility, for example, is the concealment tactic, which means concealing non-conformity under a facade of acquiescence (Oliver, 1991, p. 154). Indeed, there is evidence that some corporations are committed to the core competence strategy, but at the same time dene their core competencies as broadly as possible so that there is still enough room for diversifying their business lines (Sikora, 2001). Our study suggests that companies should adopt this leveraged strategy particularly at times when a concept is at the height of fashion and the applause from Wall Street is the loudest.
186 REFERENCES
Abrahamson, E. (1991). Managerial fads and fashions: the diffusion and rejection of innovations. Academy of Management Review, 16, 586612. Abrahamson, E. (1996). Management fashion. Academy of Management Review, 21, 25485. Abrahamson, E. and Fairchild, G. (1999). Management fashion: lifecycles, triggers, and collective learning processes. Administrative Science Quarterly, 44, 70840. Abrahamson, E. and Rosenkopf, L. (1993). Institutional and competitive bandwagons: using mathematical modeling as a tool to explore innovation diffusion. Academy of Management Review, 18, 487517. Amihud, Y. and Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. Bell Journal of Economics, 12, 60517. Arend, R. (2006). Bursting bubbles: what the internet could have meant to strategic management academia. Journal of Management Inquiry, 15, 37282. Barron, O. E., Kim, O., Lim, S. C. and Stevens, D. E. (1998). Using analysts forecasts to measure properties of analysts information environment. The Accounting Review, 73, 42133. Baumol, W. J. (1967). Business Behavior, Value, and Growth. New York: Harcourt, Brace and World. Beckers, S., Steliaros, M. and Thomson, A. (2004). Bias in European analysts earnings forecasts. Financial Analysts Journal, 60, 7485. Benders, J. and van Veen, K. (2001). Whats in a fashion? Interpretative viability and management fashions. Organization, 8, 3353. Benders, J., Nijholt, J. and Heusinkveld, S. (2007). Using print media indicators in management fashion research. Quality and Quantity, 41, 81529. Berger, P. G. and Ofek, E. (1995). Diversications effect on rm value. Journal of Financial Economics, 37, 3965. Berger, P. G. and Ofek, E. (1999). Causes and effects of corporate refocusing programs. The Review of Financial Studies, 12, 31145. Bhagat, S., Shleifer, A. and Vishny, R. (1990). Hostile Takeovers in the 1980s: The Return to Corporate Specialization. Brookings Papers on Economic Activity: Microeconomics, 172. Bikhchandani, S., Hirshleifer, D. and Welch, I. (1998). Learning from the behavior of others: conformity, fads, and informational cascades. Journal of Economic Perspectives, 12, 15170. Birkinshaw, J., Hamel, G. and Mol, M. J. (2008). Management innovation. Academy of Management Review, 33, 82545. Brancato, C. K. (1997). Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Values. Chicago, IL: Irwin. Brealey, R. A., Myers, S. C. and Allen, F. (2006). Corporate Finance. New York: McGraw Hill. Brown, L. D. (1993). Earnings forecasting research: its implications for capital markets research. International Journal of Forecasting, 9, 295320. Brown, L. D. (1997). Analysts forecast errors: additional evidence. Financial Analysts Journal, 53, 818. Carson, P. P., Lanier, P. A., Carson, K. D. and Guidry, B. N. (2000). Clearing a path through the management fashion jungle: some preliminary trailblazing. Academy of Management Journal, 43, 114358. Chang, S. J. (1996). An evolutionary perspective on diversication and corporate restructuring: entry, exit, and economic performance during 19819. Strategic Management Journal, 17, 587611. Chang, S. J. and Hong, J. (2000). Economic performance of group-afliated companies in Korea: intragroup resource sharing and internal business transactions. Academy of Management Journal, 43, 42948. Chatterjee, S. and Blocher, J. D. (1992). Measurement of rm diversication: is it robust?. Academy of Management Journal, 35, 87488. Chatterjee, S. and Singh, J. (1999). Are trade-offs inherent in diversication moves? A simultaneous model for type of diversication and mode of expansion decision. Management Science, 45, 2541. Cornelissen, J. P. (2006). Metaphor and the dynamics of knowledge in organization theory: a case study of the organizational identity metaphor. Journal of Management Studies, 43, 683709. Datta, D. K., Rajagopalan, N. and Rasheed, A. M. A. (1991). Diversication and performance: critical review and future directions. Journal of Management Studies, 28, 52958. David, R. J. and Strang, D. (2006). When fashion is eeting: transitory collective beliefs and the dynamics of TQM consulting. Academy of Management Journal, 49, 21533. Davidson, R. and MacKinnon, J. G. (1993). Estimation and Inference in Econometrics. New York: Oxford University Press. Davis, G. F., Diekmann, K. A. and Tinsley, C. H. (1994). The decline and fall of the conglomerate rm in the 1980s: the deinstitutionalization of an organizational form. American Sociological Review, 59, 54770.
187
DeBondt, W. F. M. and Forbes, W. P. (1999). Herding in analyst earnings forecasts: evidence from the United Kingdom. European Financial Management, 5, 14363. DeBondt, W. F. M. and Thaler, R. H. (1990). Do security analysts overreact?. The American Economic Review, Papers and Proceedings of the Hundred and Second Annual Meeting of the American Economic Association, 80, 527. Deutsch, C. H. (1997). Clearing out the kitchen sink: conglomerates learn to pick their spots. New York Times, 29 July, C14. DiMaggio, P. and Powell, W. (1983). The iron cage revisited: institutional isomorphism and collective rationality in organizational elds. American Sociological Review, 48, 14760. Dobbin, F. and Zorn, D. (2005). Corporate malfeasance and the myth of shareholder value. Political Power and Social Theory, 17, 17998. Duru, A. and Reeb, D. M. (2002). International diversication and analysts forecast accuracy and bias. The Accounting Review, 77, 41533. Easterwood, J. C. and Nutt, S. R. (1999). Inefciency in analysts earnings forecasts: systematic misreaction or systematic optimism?. The Journal of Finance, 54, 177797. Fama, E. F. (1970). Efcient capital markets: a review of theory and empirical work. The Journal of Finance, 25, 383417. Fama, E. F. and Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 26, 30125. Fligstein, N. (1990). The Transformation of Corporate Control. Cambridge, MA: Harvard University Press. Garca-Meca, E. and Snchez-Ballesta, J. P. (2006). Inuences on nancial analyst forecast errors: a meta-analysis. International Business Review, 15, 2952. Gill, J. and Whittle, S. (1992). Management by panacea: accounting for transcience. Journal of Management Studies, 30, 28195. Gillan, S. L. and Starks, L. T. (2000). Corporate governance proposals and shareholder activism: the role of institutional investors. Journal of Financial Economics, 57, 275305. Giroux, H. (2006). It was such a handy term: management fashions and pragmatic ambiguity. Journal of Management Studies, 43, 122760. Grant, R. M., Jammine, A. P. and Thomas, H. (1988). Diversity, diversication, and protability among British manufacturing companies, 197284. Academy of Management Journal, 31, 771801. Greene, W. H. (2003). Econometric Analysis. Upper Saddle River, NJ: Prentice Hall. Gu, Z. and Wu, J. S. (2003). Earnings skewness and analyst forecast bias. Journal of Accounting and Economics, 35, 529. Guedj, O. and Bouchaud, J.-P. (2005). Experts earning forecasts: bias, herding and gossamer information. International Journal of Theoretical and Applied Finance, 8, 93346. Hadlock, C. J., Ryngaert, M. and Thomas, S. (2001). Corporate structure and equity offerings: are there benets to diversication?. Journal of Business, 74, 61335. Harper, N. W. C. and Viguerie, S. P. (2002). Are you too focused?. McKinsey Quarterly, Special Edition: Risk and Resilience, 2837. Haspeslagh, P. (1982). Portfolio planning: uses and limits. Harvard Business Review, 60, 5873. Heuskel, D. (2002). Mit dem Mythos der Fokussierung sollte endlich Schluss sein. Handelsblatt, 52, 10. Hill, C. W. L., Hitt, M. A. and Hoskisson, R. E. (1992). Cooperative versus competitive structures in related and unrelated diversied rms. Organization Science, 3, 50121. Hodgkinson, G. P. and Rousseau, D. M. (2009). Bridging the rigorrelevance gap in management research: it is already happening!. Journal of Management Studies, 46, 53446. Hoskisson, R. E., Johnson, R. A., Tihanyi, L. and White, R. E. (2005). Diversied business groups and corporate refocusing in emerging economies. Journal of Management, 31, 94165. Huczynski, A. A. (1993). Explaining the succession of management fads. The International Journal of Human Resource Management, 4, 44363. Hyland, D. C. and Diltz, J. D. (2002). Why rms diversify: an empirical examination. Financial Management, 31, 5181. Jacquemin, A. P. and Berry, C. H. (1979). Entropy measure of diversication and corporate growth. The Journal of Industrial Economics, 27, 35969. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48, 83180. Jensen, M. C. and Meckling, W. H. (1976). Theory of the rm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3, 30560. John, K. and Ofek, E. (1995). Asset sales and increase in focus. Journal of Financial Economics, 37, 10526. Kahneman, D. and Tversky, A. (1973). On the psychology of prediction. Psychological Review, 80, 23751.
188
Kanter, R. M. (1991). The future of bureaucracy and hierarchy in organizational theory: a report from the eld. In Bordieu, P. and Coleman, J. S. (Eds), Social Theory for a Changing Society. London: Westview Press, 6387. Karpoff, J. M., Malatesta, P. H. and Walkling, R. A. (1996). Corporate governance and shareholder initiatives: empirical evidence. Journal of Financial Economics, 42, 36595. Kieser, A. (1997). Rhetoric and myth in management fashion. Organization, 4, 4974. Kieser, A. (2002). Managers as marionnettes? Using fashion theories to explain the success of consultancies. In Kipping, M. and Engwall, L. (Eds), Management Consulting Emergence and Dynamics of a Knowledge Industry. Oxford: Oxford University Press, 16783. Kieser, A. and Leiner, L. (2009). Why the rigorrelevance gap in management research is unbridgeable. Journal of Management Studies, 46, 51633. Lang, M. H. and Lundholm, R. J. (1996). Corporate disclosure policy and analyst behavior. The Accounting Review, 71, 46792. Lazonick, W. and OSullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29, 1335. Lys, T. and Sohn, S. (1990). The association between revisions of nancial analysts earnings forecasts and security-price changes. Journal of Accounting and Economics, 13, 34163. Marcus, A. A., Goodman, R. S. and Grazman, D. N. (1995). The diffusion of strategic management frameworks. Advances in Strategic Management, 12B, 11545. Markides, C. C. (1996). Diversication, Refocusing, and Economic Performance. Cambridge, MA: The MIT Press. Marris, R. and Mueller, D. C. (1980). The corporation, competition, and the invisible hand. Journal of Economic Literature, 18, 3263. Martin, J. D. and Sayrak, A. (2003). Corporate diversication and shareholder value: a survey of recent literature. Journal of Corporate Finance, 9, 3757. Meyer, J. W. and Rowan, B. (1977). Institutionalized organizations: formal structure as myth and ceremony. The American Journal of Sociology, 83, 34063. Montgomery, C. A. (1982). The measurement of rm diversication: some new empirical evidence. Academy of Management Journal, 25, 299307. Moreton, P. and Zenger, T. R. (2005). Corporate Strategy and Analyst Incentives: Do Capital Markets Encourage or Discourage Uniqueness? Working Paper, Washington University, St Louis, MO. Moyer, R. C., Chateld, R. E. and Sisneros, P. M. (1989). Security analyst monitoring activity: agency costs and information demands. The Journal of Financial and Quantitative Analysis, 24, 50312. Newell, S., Robertson, M. and Swan, J. (2001). Management fads and fashions. Organization, 8, 515. Nicolai, A. T. and Dautwitz, J. (2009). Fuzziness in action: what consequences has the linguistic ambiguity of the core competence concept for organizational usage?. British Journal of Management. doi: 10.1111/ j.1467-8551.2009.0062.x. Nicolai, A. T. and Thomas, T. W. (2004). Kapitalmarktkonforme Unternehmensfhrung: eine Analyse im Lichte der jngeren Strategieprozesslehre. Schmalenbachs Zeitschrift fr betriebswirtschaftliche Forschung (zfbf ), 56, 45269. Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16, 14579. OMahoney, J. (2007). The diffusion of management innovations: the possibilities and limitations of memetics. Journal of Management Studies, 44, 132448. ONeill, H. M., Pouder, R. W. and Buchholtz, A. K. (1998). Patterns in the diffusion of strategies across organizations: insights from the innovation diffusion literature. Academy of Management Review, 23, 98114. Palepu, K. (1985). Diversication strategy, prot performance and the entropy measure. Strategic Management Journal, 6, 23955. Phillips, D. J. and Zuckerman, E. W. (2001). Middle-status conformity: theoretical restatement and empirical demonstration in two markets. The American Journal of Sociology, 107, 379429. Prahalad, C. K. and Hamel, G. (1990). The core competence of the corporation. Harvard Business Review, 68, 7991. Rao, H. and Sivakumar, K. (1999). Institutional sources of boundary-spanning structures: the establishment of investor relations departments in the Fortune 500 industrials. Organization Science, 10, 2742. Rappaport, A. (1986). Creating Shareholder Value: The New Standard for Business Performance. New York: Free Press. Rigby, D. and Bilodeau, B. (2007). Bains global 2007 management tools and trends survey. Strategy & Leadership, 35, 916. Servaes, H. (1996). The value of diversication during the conglomerate merger wave. The Journal of Finance, 51, 120125.
189
Sikora, M. (2001). The new boundaries of diversication. Mergers and Acquisitions Journal, 36, 610. Staw, B. M. and Epstein, L. D. (2000). What bandwagons bring: effects of popular management techniques on corporate performance, reputation, and CEO pay. Administrative Science Quarterly, 45, 52356. Stiglitz, J. E. (2003). The Roaring Nineties: A New History of the Worlds Most Prosperous Decade. New York: W. W. Norton & Company. The Denver Post (2001). Colorado companies to watch so on way up, some down but all worth keeping eye on in 2002. 2 December, K1. The Economist (1996). Making companies efcient: the year downsizing grew up. 21 December, 67. The New York Times (1999). Disney said to be selling Fairchild publications. 13 August, C1. The Seattle Times (1998). Boeings toughest test yet. 1 February, A1. The Sunday Telegraph (2004). Dont cry for the conglomerates. 18 December, A2. The Wall Street Journal (2000). Tracking stocks are likely to derail. 14 February, A42. Useem, M. (1996). Investor Capitalism: How Money Managers are Changing the Face of Corporate America. New York: Basic Books. Varadarajan, P. R., Jayachandran, S. and White, J. C. (2001). Strategic interdependence in organizations: deconglomeration and marketing strategy. Journal of Marketing, 65, 1528. Welch, I. (2000). Herding among security analysts. Journal of Financial Economics, 58, 36996. White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 81738. Wooten, L. P., Parmigiani, A. and Lahiri, N. (2005). C. K. Prahalads passion: reections on his scholarly journey as a researcher, teacher and management guru. Journal of Management Inquiry, 14, 16875. Zhang, X. F. (2006). Information uncertainty and analyst forecast behavior. Contemporary Accounting Research, 23, 56590. Zuckerman, E. W. (1999). The categorical imperative: securities analysts and the illegitimacy discount. The American Journal of Sociology, 104, 1398438. Zuckerman, E. W. (2000). Focusing the corporate product: securities analysts and de-diversication. Administrative Science Quarterly, 45, 591619.

Strategic Management Journal10

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Strategic Management Journal10

Hochgeladen von

Copyright:

Verfügbare Formate

Journal of Management Studies 47:1 January 2010 doi: 10.1111/j.1467-6486.2009.00862.

Alexander T. Nicolai, Ann-Christine Schulz and Thomas W. Thomas

What Wall Street Wants

What Wall Street Wants

What Wall Street Wants

What Wall Street Wants

No. of articles (adj.)

Figure 1. Adjusted numbers of articles on core competence and core business

What Wall Street Wants

What Wall Street Wants

What Wall Street Wants

0.75 0.32 0.68 4591.88 9448.24 1356.96

0.74 0.30 0.68 3091.06 5487.30 1361.80

0.41 0.50 0.48 4.41 1.96 4.00

0.38 0.30 0.00 2.85 1.11 2.00

0.01 0.10 0.00 1.59 1.20 1.00

0.68 0.26 0.63 3.69 2.05 3.00

What Wall Street Wants

analyst surpriseit = a 0 + b1fashion discourset + b2 forecast dispersion it + b3 firm sizeit + b4 leverageit + e it .

What Wall Street Wants

0.04 0.05 0.07 -0.09 -0.19*** 0.09* 0.11

-0.29*** 0.06 0.08 0.22*** 0.02 -0.07

-0.10* 0.04 -0.05 0.03 0.04

0.36*** 0.27*** 0.06 0.25***

0.40*** 0.02 0.03

Notes: * p < 0.10; ** p < 0.05; *** p < 0.01.

What Wall Street Wants

What Wall Street Wants

What Wall Street Wants

What Wall Street Wants

What Wall Street Wants

Das könnte Ihnen auch gefallen

-0.29* 0.06 0.08 0.22* 0.02 -0.07

0.36* 0.27* 0.06 0.25***

Notes: * p < 0.10; p < 0.05; * p < 0.01.