Getting Mixed Signals? How Top Executive Communications about Firm Strategy Shape Market Evaluations

Markets have a fundamental information asymmetry problem in evaluating public organizations, as market actors lack detailed firsthand knowledge about organizational capabilities and strategies. Top executive communication helps to address this asymmetry by providing information about firm strategies that signal firm quality and intentions. In this study we use signaling theory to examine how top executive communications about different parts of their firm’s strategy provide signals to securities analysts that shape their evaluations of the company. We hypothesize that analysts, working on behalf of shareholders who are interested in stock growth, positively evaluate communication related to externally-oriented strategies that signal alignment with analyst goals for growth, and negatively evaluate communication that focuses on internally-oriented maintenance strategies that signal concerns about firm capabilities and market positioning. We then explore the potential moderating influence of factors that reduce signal efficacy through lower signal intensity or weaker signal consistency. We find support for our arguments using a novel text analysis tool in a random sample of S&P500 companies. In supplemental analysis we find that several contextual factors can also magnify or suppress signal impact, assess which specific strategies have the biggest impact, and identify different patterns for high and low performing firms.