Who violates expectations when? How firms' growth and dividend reputations affect investors' reactions to acquisitions

• Author: Justin J. P. Jansen,Korcan Kavusan,Radina R. Blagoeva
• DOI: http://doi.org/10.1002/smj.3155
• Published date: 01 September 2020
• Date: 01 September 2020

RESEARCH ARTICLE

Who violates expectations when? How firms'

growth and dividend reputations affect

investors' reactions to acquisitions

Radina R. Blagoeva

1

| Korcan Kavusan

2

| Justin J. P. Jansen

2

1

Terry College of Business, University of Georgia, Athens, Georgia

2

Department of Strategic Management and Entrepreneurship, Rotterdam School of Management, Erasmus University,

Rotterdam, The Netherlands

Correspondence

Korcan Kavusan, Department of Strategic

Management and Entrepreneurship,

Rotterdam School of Management,

Erasmus University, Burgemeester

Oudlaan 50, 3062 PA Rotterdam, The

Netherlands.

Email: kavusan@rsm.nl

Funding information

Erasmus Trustfonds

Abstract

Research summary:We investigate the role of a firm's

dividend and growth reputations in shaping investors'

interpretations of acquisitions as a negative or positive

expectation violation. While our findings reveal that

both an acquiring firm's dividend and growth reputa-

tions trigger positive investor reactions, they also show

that investors react negatively to an acquisition of a tar-

get firm with a strong growth reputation when the

acquiring firm has a strong dividend reputation. We

also find that investors are inclined to give managers

“the benefit of the doubt”to the extent that an acquir-

ing firm strategically frames an acquisition announce-

ment in such a way that it provides assurance to

investors that the acquisition is meant to exceed inves-

tors' expectations about shareholder value creation.

Managerial summary:We study why investors

respond to some acquisitions positively and others neg-

atively. We find that the way acquiring and target firms

have created shareholder value in the past, and the

information conveyed in the acquisition announce-

ments are important determinants of investors'

Received: 13 November 2018 Revised: 6 January 2020 Accepted: 8 February 2020 Published on: 14 April 2020

DOI: 10.1002/smj.3155

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2020 The Authors. Strategic Management Journal published by John Wiley & Sons, Ltd. on behalf of Strategic Management Society.

1712 Strat. Mgmt. J. 2020;41:1712–1742.wileyonlinelibrary.com/journal/smj

differential reactions to acquisitions. Our findings show

that while investors generally react positively to acqui-

sitions by firms known for creating value either

through dividends or growth, their reactions become

negative when a firm known for value creation through

dividends acquires a target known for value creation

through growth. We further find that managers can

favorably influence investor reactions by making it

salient in the acquisition announcement how the acqui-

sition is intended to exceed investors' value creation

expectations from the acquiring firm.

KEYWORDS

acquisition announcements, expectancy violation theory, framing,

investor reactions, mergers and acquisitions, reputation

1|INTRODUCTION

Global acquisition activity continues to surge, and in 2019 alone firms spent $4.1 trillion on

acquisitions (Dealogic, 2020). Although acquisitions are intended to create value, investors typi-

cally react negatively to acquisition announcements (Haleblian, Devers, McNamara,

Carpenter, & Davison, 2009). Drawing on the expectancy violation theory (EVT), Graffin,

Haleblian, and Kiley (2016) explain such reactions by investors' interpretations of acquisitions

as a violation of their expectations regarding how firms should behave to create value. Given

the widespread observation that most acquisitions fail to reach their objectives (e.g., Haleblian

et al., 2009), it is plausible that investors are skeptical about the value-creation potential of

acquisitions. However, these insights do not readily explain why investors evaluate some acqui-

sitions positively (Campbell, Sirmon, & Schijven, 2016). Interestingly, the positive reactions of

investors to acquisitions imply that they perceive specific acquisitions from a subset of firms to

be compatible with how they expect these firms to create value. However, we know little about

how and under what circumstances the varied expectations of investors about acquiring firms

influence when they perceive acquisitions to be a good or a bad deal.

One key explanation for investors' varied reactions to acquisitions is acquiring firms' reputa-

tion for creating shareholder value. These reputations shape investors' expectations of acquiring

firms, influencing how they interpret an acquisition and react to it (Haleblian, Pfarrer, &

Kiley, 2017). Scholars have argued that investors tend to punish high-reputation firms more

severely for making acquisitions (Haleblian et al., 2017), because acquisitions are not generally

perceived to be conducive to value creation (Graffin et al., 2016). However, firms can create

shareholder value in multiple ways (Brealey, Myers, & Allen, 2014). Firms can thus develop dis-

tinct reputations originating from specific ways of creating shareholder value, which may give

rise to different expectations (Mishina, Block, & Mannor, 2012; Parker, Krause, &

Devers, 2019). Some of these expectations may provide firms with a greater leeway to pursue

specific strategic actions, such as acquisitions, to fulfill investors' expectations (e.g., Pfarrer,

Pollock, & Rindova, 2010; Rindova, Williamson, Petkova, & Sever, 2005; Zavyalova, Pfarrer,

BLAGOEVA ET AL.1713