Foreshadowing as Impression Management: Illuminating the Path for Security Analysts

• Author: S. Trevis Certo,Donald Lange,John R. Busenbark
• Published date: 01 December 2017
• Date: 01 December 2017
• DOI: http://doi.org/10.1002/smj.2659

Strategic Management Journal

Strat. Mgmt. J.,38: 2486–2507 (2017)

Published online EarlyView 24 April 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2659

Received 19 October 2016;Final revision received15 March 2017

Foreshadowing as Impression Management:

Illuminating the Path for Security Analysts

John R. Busenbark,1*Donald Lange,2and S. Trevis Certo2

1Department of Management, Terry College of Business, University of Georgia,

Athens, Georgia

2Department of Management and Entrepreneurship, W.P. Carey School of Business,

Arizona State University, Tempe, Arizona

Research summary: Managers can disclose information to security analysts as a form of

impression management, but doing so is problematic because competitors can use that same

information at the expense of the rm. We identify an impression management technique we call

foreshadowing, which refers to hinting about future potential strategic activity. Foreshadowing

provides information of value to analysts that can inuence their evaluations of a rm, but not

so much information as to put the rm at a competitive disadvantage. We hypothesize and nd

that managers who foreshadow acquisition announcements receive fewer analyst downgrades

following the announcements, especially when there is more analyst uncertainty about the rm.

We also hypothesize and nd that analysts’ responses to foreshadowing positively inuence the

likelihood that managers eventually acquire other rms.

Managerial summary: Security analysts are often suspicious when rms announce acquisitions

as those announcements are cumbersome to analyze on short notice and raise questions about

managerial motivations that might not represent the best interests of the rm. We nd that

managers can improve analyst reactions to acquisition announcements by disclosing some

information of value to analysts— specically by hinting that an acquisition could occur in the

future.We refer to such hints as foreshadowing.Foreshadowing entails giving analysts information

to reduce their suspicions and facilitate their analyses, but not so much information as to

degradethe rm’s competitive information advantage over other rms. Foreshadowingalso allows

managers the option to reconsideractually executing the acquisition if analysts respond negatively

to its possibility. Copyright © 2017 John Wiley & Sons, Ltd.

Managers are understandably concerned about how

external stakeholders perceive the rm and react to

its actions (Elsbach, 2014; Westphal & Graebner,

2010). Accordingly, they may engage in any num-

ber of impression management techniques to inu-

ence observers’ perceptions of the rm. Such tech-

niques may decrease negative reactions to poten-

tially unfavorable information or otherwise place

the rm and its actions in a positive light (Elsbach,

Keywords: impression management; acquisitions; secu-

rity analysts; voluntary disclosure; uncertainty

*Correspondence to: John R. Busenbark, 420 Brooks Hall, 310

Herty Drive,Athens, GA 30602. E-mail: john.busenbark@uga.edu

Copyright © 2017 John Wiley & Sons, Ltd.

2014; Elsbach & Sutton, 1992). Strategy scholars

have explored impression management techniques

such as providing offsetting positive information

around a negative event (e.g., Grafn, Haleblian,

& Kiley, 2016), issuing unrelated information to

obfuscate a negative event (e.g., Grafn, Carpen-

ter, & Boivie, 2011), and providing a large amount

of information about an event to decrease specu-

lation about managers’ intentions (e.g., Washburn

& Bromiley, 2014). Managers may also attempt to

inuence stakeholders’ impressions by maintaining

ongoing positive relationships with them to buffer

future potential negativeperceptions (e.g ., Westphal

& Clement, 2008) or by working to induce positive

Foreshadowing as Impression Management 2487

emotions about the rm despite the occurrence of

a negative event (e.g., Elsbach, Sutton, & Principe,

1998).

Security analysts are critical stakeholders for the

rm, and managers will likely desire to inuence

their impressions about the rm and its activities

(Pfarrer, Pollock, & Rindova, 2010; Washburn &

Bromiley, 2014). Security analysts serve as impor-

tant information intermediaries between a rm and

the broader market (Benner & Ranganathan, 2012;

Westphal & Clement, 2008). Because the rm’s

insiders know much more than outsiders about the

rm’s plans, progress, successes, and stumbles,

there is considerable information asymmetry

between the insiders and the rm’s investors (B.

D. Cohen & Dean, 2005; Healy & Palepu, 2001).

By studying rms in depth, security analysts work

to reduce that information asymmetry for the

investors who are their clients (Feldman, Gilson,

& Villalonga, 2013). Investors tend to have less

expertise than analysts on a rm’s strategies, and

therefore, may rely on analyst assessments of a

rm’s strategic direction for guidance on their

investment decisions (Barber etal., 2001; Feldman

et al., 2013). Consequently, the opinions of a few

security analysts covering a rm can inuence

the investment decisions of their clients. and in

turn, the reactions of the rm’s other investors

and stakeholders (Benner & Ranganathan, 2012;

Westphal & Clement, 2008).

A key way that managers attempt to favorably

inuence analysts’ assessments of the rm is by

providing them with information (Jensen, 2006;

Washburn & Bromiley, 2014). Information from

inside the rm is important to analysts because they

can never be entirely certain as to why managers

select specic activities, whether managers are act-

ing opportunistically, or exactly how strategic ini-

tiatives will affect rm performance (Botosan &

Stanford, 2005). Managers can use information dis-

closures to provide rationales, decrease suspicions,

or simply make the rm appear more favorable

to analysts (Skinner, 1994; Washburn & Bromiley,

2014; Westphal & Clement, 2008; Whittington,

Yakis-Douglas, & Ahn, 2016). Analysts are apt to

be eager consumers of information from inside the

rm because they can use it to increase their credi-

bility with their clients, and perhaps, gain insights

about the rm that competing analysts have not

realized (Brown et al., 2015, 2016).

The downside for managers using information to

attempt to inuence analyst reactions is that they

risk giving away too much information. Managers

must walk a tightrope between giving analysts suf-

cient information to reduce their suspicions and

facilitate their analyses, but not so much informa-

tion as to degrade the rm’s competitive informa-

tion advantage over other rms (Lewis, Walls, &

Dowell, 2014). The same information that proves

valuable to analysts is also valuable to competitors

(M. Lang & Sul, 2014; Verrecchia,1990). Managers

must communicate important information to secu-

rity analysts while remaining wary of disclosing so

much information that competitors can use it against

their rm (Healy & Palepu, 2001).

The primary objective of this article is to investi-

gate how managers might negotiate that balancing

act, meaning how they might disclose information

to inuence analyst assessments without sharing

too much information. We identify a technique that

some rms use to allow security analysts to peer

behind the information veil, if only briey, to get a

sense of potential future strategic activity. We label

that technique foreshadowing, meaning that the

rm issues intentionally vague information about

the possibility of future involvement in an activity

or event that potentially is controversial. Effective

foreshadowing is ambiguous enough not to receivea

strong negative reaction, butis suggestive enough to

lay a perceptual groundwork for the rm’s potential

future activity. Further, foreshadowing can suggest

the possibility of future strategic activity without

disclosing specic information that would provide

an advantage to competitors.

We posit that foreshadowing the potential for

a controversial strategic action, such as an acqui-

sition, reduces the negativity of analyst reactions

to the eventual announcement. Analysts tend to

dislike activities that arise abruptly or require

extensive analysis very quickly (Barron, Byard,

& Yu, 2008; Pfarrer et al., 2010), and they are

apt to react pessimistically when rms announce

potentially controversial strategies (Brown etal.,

2015). Therefore, analysts often respond negatively

to events like acquisition announcements (Hous-

ton, James, & Ryngaert, 2001). We argue that

foreshadowing improves analyst reactions because

it decreases the abrupt nature of an acquisition

announcement and allows analysts to consider the

possibility of the future activity (e.g., acquisition)

without creating the need to fully analyze it at

the instance of foreshadowing. Foreshadowing

provides analysts with valuable information that

can help them reduce the time required to evaluate

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2486–2507 (2017)

DOI: 10.1002/smj