Stock Return or Sales Growth? Multiple Performance Feedback and Strategic Investments Under Securities Analysts’ Earnings Pressure

• Author: Yu Zhang,Yan Gong
• DOI: http://doi.org/10.1111/joms.12392
• Published date: 01 December 2018
• Date: 01 December 2018

© 2018 John Wiley & Sons Ltd and S ociety for the Advancement of Ma nagement Studies

Stock Return or Sales Growth? Multiple Performance

Feedback and Strategic Investments Under Securities

Analysts’ Earnings Pressure

Yu Zhang and Yan Gong

China Europe International Business School (CEIBS)

ABST RACT Pressure to meet or beat earn ings forecasts from securities ana lysts leads

managers of publicly tra ded firms to i mprove short-term earning s by cutting strateg ic

investments at the expense of long-term competit iveness. Drawing on the behavioral

theory of the f irm, we explore how different dimensions of perfor mance feedback

moderate manageria l responses to this pres sure. We find that the negat ive impact of

earnings pressure on a firm’s strategic invest ments is strengthened when it receives

performance feedback from lower stock return s but is weakened when the firm receives

performance feedback from lower sales grow th. When both dimensions of performance

feedback are present, we find that sa les growth has a stronger moderating effect. O ur

paper contributes to the developing literature on multiple di mensions of performance

feedback by demonstrating how stock price and sa les growth di fferentially in fluence

managerial resp onses to earning s pressure. From a management standpoint, we

highlight the possibilit y that performa nce feedback influences manager ial responses to

earnings pressures in ways that m anagers may not fully consider.

Keywo rds: ear nings pressure, multiple perfor mance feedback, securities analysts,

strateg ic investments

INTRODUCTION

Managers of publicly traded fir ms face pressure for short-term performance

(Brauer and Wiersema, 2017; Brown and Caylor, 2005). This pressure stems from

the likelihood that the fir m’s stock price will decline if the firm fails to meet or

beat securities analy sts’ earnings forecasts (‘securities analysts’ earni ngs pressure’,

or ‘earnings pressure’ hereafter). Managers respond to such pressures in various

Journal of Manageme nt Studies 55:8 December 2018

doi: 10.1111/j oms .12 392

Address for reprints: Yu Zhang, China Eu rope Internationa l Business School (CE IBS), Shanghai,

201206, China (yu.z hang@ceibs.edu).

Stock Return or Sales Growth 1357

© 2018 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

ways, including giving lower earnings guidance to drive down a nalysts’ forecasts

(Bernhardt and Campello, 2007), engaging in ‘creative accounting’ to inflate

earnings (Degeorge et al., 1999), adopting impression management tactics to

shape analysts’ opinions (Washburn and Bromiley, 2014; Westphal and Clement,

2008; Westphal and Graebner, 2010) or reducing future-oriented strategic invest-

ments such as capital expenditures and R&D (Benner and Ra nganathan, 2012).[1]

However, research primarily uses agency theory and emphasizes t hat short-term

earnings pressure from analysts distract from long-term strategic goals. For ex-

ample, recent research examines whether and how corporate governance factors,

such as the type of institutional investor and the executive compensation struc-

ture, moderate the effect of earnings pressure on a firm’s behaviour (Zhang and

Gimeno, 2016). Despite these insights, it remains unexplored whether the dis-

tracting effect of earnings pressure could be strengthened or weakened under

different dimensions of performance feedback. Given managers’ limited atten-

tion, feedback on performance may lead to divergent managerial responses

under earnings pressure, particularly when the feedback focuses on different di-

mensions of performance. This possibility motivates u s to integrate agency theory

with other perspectives for a better understanding about the effect of earnings

pressure and its boundary conditions.

In this paper, we combine agency concerns with insights from the behavioural

theory of the firm (BTOF) (Cyert and March, 1963; Lounsbury and Beckman,

2015) to enrich research about the effect of earnings pressure on managerial deci-

sions.[2] We address the following questions. (1) How does performance feedback

from stock return and sales growth moderate the impact of earnings pressure on

strategic investment decisions and (2) what is the relative strength of these dimen-

sions of feedback? Although managers receive performance feedback on many

dimensions, stock return and sales growth are two such dimensions that have

consistently been found to strongly drive managerial behaviour (Murphy, 1999).

They also trigger strong expectations from stakeholders and, therefore, pose a

significant constraint for managers, particularly when they engage in strategic de-

cisions under earnings pressure. Moreover, earnings pressure from securities an-

alysts is a form of forward-looking performance feedback (Gavetti and Levinthal,

2000) that is understudied in the BTOF literature (Cyert and March, 1963; Gavetti

et al., p. 26; Shinkle, 2012, p. 417). Despite recent attention to multiple perfor-

mance feedback (Gaba and Joseph, 2013; Greve, 2008; Joseph and Gaba, 2015),

far less research addresses how forward-looking performance feedback interacts

with other dimensions of performance feedback in behavioural decision making.

To address this gap, we develop a theoretical framework to examine how two di-

mensions of performance feedback – stock return and sales growth – strengthen

or weaken the effect of earnings pressure on strategic investments, as well as the

relative strength of these two dimensions. We tested our theory using data on the

S&P 500 companies from 1984 to 2014.

Our study makes two primary contributions. First, this study integrates the BTOF

literature to advance research on the boundaries and contingencies of securities