What Wall Street Wants – Exploring the Role of Security Analysts in the Evolution and Spread of Management Concepts

Abstract

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 firms spanning the period 1990-2002, we show that during the 1990s analysts systematically overvalued the future earnings of refocusing firms that incorporated principles derived from the core competence concept. Moreover, we present evidence that their valuations were positively influenced 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.

Analyzing Analyst Research: A Review of Past Coverage and Recommendations for Future Research

“…Thus, analysts act as both an antecedent factor that influences managers to make portfolio decisions, and may also influence the performance outcomes of these decisions through their reassessments of the firm. The extensive research on the determinants and consequences of firm divestiture, for example, has omitted analysts as a factor, despite studies by Zuckerman (1999) and Nicolai et al (2010) that provide evidence that analyst coverage and their stock recommendations influence divestiture likelihood and intensity.…”

“…Drawing on neo-institutional and management fashion theory research, Nicolai, Schulz, and Thomas (2010), show that firm refocusing (through divestiture) is associated with a systematic positive bias regarding future earnings by analysts in the 1990s, suggesting that this overvaluation of refocusing firms may have been partly triggered by the popularity of the core competence discourse at that time.…”

Advancing Management Innovation: Synthesizing Processes, Levels of Analysis, and Change Agents

“…Studies consider the variation and diffusion of controversial practices such as the use of golden parachutes (Fiss, Kennedy, & Davis, 2012), narrative dynamics in corporate responsibility standardization (Haack, Schoeneborn, & Wickert, 2012), the emergence and deployment of a standard for responsible investment (Slager, Gond, & Moon, 2012), or the role of security analysts in the diffusion of new management concepts (Nicolai et al, 2010). Included with this perspective are also several theoretical papers that aim to outline how organizations respond to institutional complexity (Greenwood, Raynard, Kodeih, Micelotta, & Lounsbury, 2011) or disentangle diffusion and institutionalization processes (Colyvas & Jonsson, 2011).…”

“…In the neo-institutionalist view, a particular management innovation can become established through imitative behavior regardless of whether there is any evidence that the innovation actually enhances efficiency (Nicolai, Schulz, & Thomas, 2010). Internal and external change agents give their blessing to specific management practices which are in turn "adopted for symbolic reasons-seeking peer and stakeholder legitimacy" as opposed to immediate gains in performance and profit (Sturdy, 2004, p. 164).…”

“…The rational perspective most explicitly articulates the role of human agency by considering the various degrees of intentionality of internal and/or external change agents (e.g., Birkinshaw et al, 2008). In the institutional perspective, the role of human agency is spelled out much less and is mostly that of a passive legitimizer (e.g., Nicolai et al, 2010). In contrast, the theory development perspective focuses exclusively on the role of academics and management scholars as creators and transmitters of management innovations.…”