Business Publications
Document Type
Article
Publication Date
2015
Abstract
Recent research has shown that earnings pressure from financial analysts and investors encourage managers to make decisions that over-prioritize short-term profits relative to long-term value. According to this body of research, these pressures cause managers to shorten their time horizons, focusing their attention in the present and ignoring the long run implications of their decisions. However, many competing studies have shown that managers are often short term even when investors are not, and analysts and investors reward firms that make long-term investments. The equivocal findings may arise because the relationship between financial market pressures and managerial behaviors is distal. We theorize and test a more proximal relationship by arguing that the mechanism through which analysts influence managers is analysts' recommendations, and that the direct relationship is with managerial cognition. To test our hypotheses, we use textual analysis to analyze 3,136 quarterly earnings conference call transcripts of 98 firms in extractives industries between 2006 and 2013. The results suggest that organizational time horizons shorten when analysts downgrade firms, and lengthen following upgrades. However, this effect is asymmetric -- downgrades have a more potent effect than upgrades on organizational time horizons. Furthermore, these relationships change depending on the sequences of downgrades and upgrades and investors’ investment horizons.
