Divergent Reactions to Convergent Strategies: Investor Beliefs and Analyst Reactions During Technological Change

Abstract

An important outcome of technological change is industry "convergence," as a new technology spurs competition between established firms from different industries. We study the reactions of securities analysts, as important sources of institutional pressures for firms, to the similar product/market strategies undertaken by firms from different prior industries responding to industry convergence. Our empirical setting is the convergence between the wireline telecommunications and cable television industries in the period following the advent of voice over Internet protocol technology. Controlling for firm financial performance and capabilities, we find that analysts were consistently more positive toward the cable firms than toward the wireline telecom firms. Our findings further show that this divergence in reactions arises from differences in existing investor expectations and preferences concerning how firms create value; stocks owned by investors with a greater preference for growth receive more positive reactions than those owned by investors with a greater preference for margins. However, this divergence in reactions shrinks over time as convergence unfolds and as investors shift their shareholdings in response to misalignment between their preferences and firms' strategic changes. Reactions from analysts-reflecting inertial expectations of investors-may persist for a time despite changes to firms' strategies, thus creating challenges for some firms in responding to technological change and industry convergence while legitimating and enabling similar responses from their competitors. DIVERGENT REACTIONS TO CONVERGENT STRATEGIES: Investor beliefs and analyst reactions during technological change ABSTRACTAn important outcome of technological change is industry ‗convergence,' as a new technology spurs competition between established firms from different industries. We study the reactions of securities analysts, as important sources of institutional pressures for firms, to the similar product/market strategies undertaken by firms from different prior industries responding to industry convergence. Our empirical setting is the convergence between the wireline telecommunications and cable television industries in the period following the advent of Voice over Internet Protocol (VoIP) technology. Controlling for firm financial performance and capabilities, we find that analysts were consistently more positive towards the cable firms than towards the wireline telecom firms. Our findings further show that this divergence in reactions arises from different pre-convergence investor expectations and preferences concerning how firms create value; stocks owned by investors with a greater preference for growth receive more positive reactions than those owned by investors with a greater preference for margins. However, this divergence in reactions shrinks over time as convergence unfolds and as investors shift their shareholdings in response to misalignment between their preferences and firms' updated strategies. The...

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