Curious and analytical: How analysts evaluate and respond to executive communications about firm strategy

Abstract

How do analysts react to communication about firms' strategies? Research has shown that executive communication influences markets, but we know little about reactions to the deeper strategy content communicated. Drawing from research on how evaluative frames and expectation violations shape cognition, we show that when executives focus on growth strategies, analysts react by becoming more curious and analytically intensive. These changes in cognition partially mediate a positive effect on analysts' evaluations. Further, we consider two situations that reveal how analysts react to information that reinforces or violates their expectations, demonstrating different analyst reactions to similar strategies among S&P 500 firms. In doing so, we contribute new theory about how the evaluative assumptions of these influential market actors change and can be influenced by managerial framing. Managerial Summary This paper focuses on how securities analysts react to executive communications about their business' strategies. We know that top executive communications influence markets, but this paper probes further to understand reactions to the specific strategies that are communicated. We show that when executives focus on new growth strategies, this piques analyst interest. Specifically, we find that this makes analysts more curious and analytically intensive, thereby shaping their forecasts and evaluations. However, we find that analyst reactions also depend on how well the strategies that executives talk about fit with what is expected from the company. When the strategy articulated aligns with expectations, firms are rewarded with yet stronger evaluations. In contrast, when a strategy does not align with expectations, firms are punished with lower evaluations.