We examine whether managerial attention will shape a focal organizations strategic investment decisions under earnings pressure. We propose that the impact of earnings pressure on strategic investment decisions depends on (1) managerial attention towards short-term organizational performance indicators such as recent stock returns and (2) managerial attention towards long-term organizational performance indicators such as past revenue trends. Our findings indicate that earnings pressure in general drives down a firm's subsequent strategic investment levels, supporting a view of myopic learning for managers in balancing short-term and long-term organizational goals. Further, the negative impact of earnings pressure on strategic investment is amplified when a focal firm experienced recent stock price declines, but is alleviated when a focal firm experienced long-term revenue declines. This suggests that a 'switch' of managerial attention towards different performance indicators can lead to contrasting learning behaviors in a focal firm's strategic investment decisions.
In the past two decades, considerable research efforts have begun to investigate the influence of investment analyst, as an important information intermediary, on firm behaviors (Zuckerman, 1999; Rao et al., 2001). Within this line of research, two views of analyst forecast can be identified: Financial economists view analyst as a third-party efficient monitoring and controlling mechanism by shareholders (Jensen & Meckling, 1976; Jensen, 1986). Jensen and Meckling (1976) suggest that independent, expert opinions from investment analysts can reduce the agency costs associated with the separation of ownership and control. For example, researchers have found that analyst coverage increases the value of a firm to investors by reducing specific costs associated with monitoring and assessing a firm's financial performance (Chen & Steiner, 2000). Behavioral theorists, on the other hand, emphasize how analysts impact managerial behaviors by influencing stakeholder perceptions of the desirability and appropriateness of firm actions and characteristics (Zuckerman, 1999; Wiersema and Zhang, 2011). For example, more recent researches have examined how analyst forecasts of a firm's future earnings can stimulate managers' earnings management behaviors (Zuckerman, 2005; Washburn, 2009), and how analyst forecasts can drive a firm to exploit short-term market power opportunities for the purpose of enhancing short-term profits (Zhang and Gimeno, 2010). Although this literature has examined social influences from investment analysts on strategic behaviors, it has focused almost exclusively on the forms of social influences that pertain to short-term managerial responses, such as increasing or decreasing the number of conference calls to analysts (Zuckerman, 2005; Washburn, 2009). With the exception of Benner and Ranganathan (2011), there has been little theory or systematic research on the long-term strategic responses to social influences from investment analysts.
In the present study, we seek to broaden theory and research on investment analysts by examining the impact of analysts on long-term firm strategic behaviors. We ask the following research question: How does the tension felt by management about meeting or beating analysts' earnings forecasts impact the firm's long-term strategic orientation of allocating strategic investment? As defined in prior research, strategic investment includes future-oriented investment expenditures that reflect managerial decisions about long-term strategic direction (Sanders and Carpenter, 2003; Litov et al., 2009; Bushee, 1998; Maritan, 2001; Kotha and Nair, 1995; Benner and Ranganathan, 2011). By definition, strategic investment is critical for the long-term success of a firm. However, earnings pressure of meeting or beating analysts' earnings forecasts can distract managers from long-term commitments to strategic investments. In a recent worldwide survey by McKinsey & Company (2006), 42 percent of respondents (managers and board members of publicly traded firms) strongly agreed that issuing earnings guidance and trying to meet earnings expectations from analysts led the firm to focus more on short-term earnings. Anecdotal evidence from corporate leader interviews also echoes the distracting nature of earnings pressure. When asked about her most important priority in a CNBC interview, Meg Whitman, the newly appointed CEO of Hewlett & Packard, responded unequivocally: "First priority is to make the fourth quarter revenue and EPS (earnings per share) targets." (CNBC, 09/22/2011)
We develop a theoretical framework that address the effect of earnings pressure on long-term oriented strategic investment and the myopic nature of an intertemporal trade-off between current earnings and potential future earnings derived from strategic investment. We argue that earnings pressure incites firms to reduce strategic investment, even though such action may damper a firm's long-term competitive advantage. In particular, we integrate theoretical insights from the behavioral theory of the firm (BTOF) to argue that earnings pressure creates a misalignment of causal ambiguity between short-term earnings pressure and future-oriented strategic investment; the misalignment shapes a firm's tendency to address short-term earnings pressure at the expenses of long-term oriented strategic investments. We further extend our theoretical framework to address the contingencies of earnings pressure on strategic investment by considering how the myopic effect of earnings pressure is exacerbated or alleviated by two different types of performance feedback - feedback on financial market performance and feedback on product market performance. We draw from the BTOF literature on performance-based feedback to explain how a firm's strategic investment allocation under earnings pressure can be further disrupted in the face of its poor performance in financial markets, and how a firm's strategic investment decision under earnings pressure can be overturned in the face of its declining growth. Specifically, we predict that stock price declines will lead managers to be more responsive to the pressure to meet or beat analysts' earnings forecasts, while revenue declines will lead managers to be less responsive to earnings pressure. Our theory further explains the relative weight a firm puts on the two types of performance feedback. We test our hypotheses with a unique data set that includes derived variable of firm earnings pressure for an xxxx-year period.
The contributions of our study are three-fold. First, our paper broadens theory and research on investment analysts by examining empirically the interactions between earnings pressure from investment analysts and strategy decisions. While strategy scholars and practitioners alike have long concerned whether earnings pressure leads to changes in strategic decisions and whether those effects are positive or detrimental to a firm's long run performance, the exploration has been mainly fueled by anecdotal evidence (Abegglen & Stalk, 1985; Porter, 1992; Useem, 1996), interviews or surveys with managers (Graham et al., 2005; McKinsey & Company, 2006), classroom experiments (Bhojraj & Libby, 2005), or indirect inference from financial statements (Roychowdhury, 2006). In contrast, this study provides systematic direct evidence of the consequences of earnings pressure for firms' strategic investment decision, and thus adds to our understanding of the impact that investment analysts and capital markets impose on firm strategy and performance (Benner, 2007; Beunza & Garud, 2005; Moreton & Zenger, 2005; Zuckerman, 1999, 2000; Laverty, 1996).
Second, this study also extends inquiry into boundary conditions of managerial myopic behaviors in that it may be the first theory-driven study to systematically examine how and when the myopic behavior driven by earnings pressure can be accelerated or mitigated in the face of different performance conditions. Although identifying factors that influence the intertemporal trade-off of managers have been among the central concerns of scholars who study them, management researchers have given little theoretical or empirical attention to the question of how the dynamic between short-termism pressure and long-run strategy can be reshaped by varying feedback loops along different performance dimensions. Our theory and findings show how different performance goals (Greve, 2008; Ocasio, 1997) will differentially moderate firms' response to earnings pressure on strategic investment decisions, and the goal for firm growth dominates the goal for maintain its financial market performance in our setting.
Third, we advance understanding of managerial attention to performance goals in different dimensions. This is important because models of performance goals only square incompletely with empirical observations of decision makers facing a singular dimension (e.g., Greve, 2003; 2008). Broadening the set of performance goal dimensions is thus valuable for understanding firm response to external pressure imposed by securities analyst.
THEORY AND HYPOTHESES
Earnings Pressure
Earnings pressure results from the complex dynamic interactions between investors, investment analysts, and managers, in a context characterized by uncertainty, asymmetric information, imperfect observability of managerial actions, and potential conflicts of interest (Zhang and Gimeno, 2010). As potential investors rely on external equity analysts to analyze the past performance and future earnings potential of the firms, in that role investment analysts use information disclosed by managers about past performance and future prospects for the company, as well as their professional judgment and the social influence of the judgments of their peers. The convergence among analysts on some estimates for future earnings for the company (the "consensus" earnings forecasts) creates a powerful reference point that influences managerial behavior (Schipper, 1991; Degeorge et al., 1999).
Securities analysts play an important role in the functioning of modern financial markets. They provide earnings forecasts and buy/sell recommendations for investors, based on information that managers disclose about the company's past and future performance, as well as their own professional judgments (Schipper, 1991; Davis and Useem, 2002; Davis, 2005). The convergence among analysts on certain estimates for a company's future earnings (the "consensus", or the average of analysts' earnings forecasts) creates a powerful focal point for expectations that influences managerial behavior. Failing to meet the "consensus" forecast, even by a small margin, usually causes the stock price to drop disproportionally (Kasznik and McNichols, 2002; Bartov, Givoly, and Hayn, 2002), which can have a big impact on the managers' compensation and possibly lead to their dismissal from the company (Hall and Liebman, 1998; Puffer and Weintrop, 1991; Farrell and Whidbee, 2003).
Given consistent operating and accounting practices, managements develop internal expectations about their firms' future performance that are based on historical performance, comparisons with peer firms (Cyert & March, 1963; Greve, 2003), and estimates about internal and external changes (Chen, 2008; Gavetti & Levinthal, 2000). Managers experience attainment discrepancy when, for a given future or ongoing period of activity (year or quarter), the consensus of external analysts' earnings forecasts is above the internal expectations of management about future company earnings (Wiseman & Bromiley, 1996). Earnings pressure may result from the confluence of two intertwined conditions: (1) divergence between analysts' and management's earnings expectations and (2) the large actual and perceived market penalties for a company missing earnings forecast consensus.
While stock prices in general respond positively when firms meet or beat consensus analyst forecasts, failing to meet the analysts' expectations, even if by a small margin, usually causes stock prices to drop more than proportionally to the earnings gap (Kasznik & McNichols, 2002; Bartov, Givoly & Hayn, 2002). For example, Skinner and Sloan (2002) found that unexpectedly missing earnings forecasts by 1 percent could lead to a negative abnormal stock market return of 15 percent for growth stocks and 5 percent for value stocks. This stock price reduction can have a huge impact on the managers' stock options compensation (Hall and Liebman, 1998). Failing to meet analysts' earnings forecasts is also a strong predictor of CEO turnover (Puffer and Weintrop, 1991). Hence, managers have strong incentives to meet earnings expectations through various means. One common approach is to disclose information and realistic objectives to guide earnings forecasts downward toward achievable levels (Bernhardt & Campello, 2004). In addition, anecdotal and empirical evidence have shown managers to use "creative" accounting methods to meet earnings expectations, such as capitalizing expenditures and managing discretionary accruals (Degeorge et al., 1999), or use symbolic language to reduce the negative impact when they report earnings below consensus expectations (Pozner & Zajac, 2005).
For organization and strategy scholars, an important concern about earnings pressure is whether it distorts the firm's strategic direction and hinders its competitive advantage in the long run or not (Porter, 1992). Managers have scorned this pressure for decades, claiming that it deters them from taking necessary strategic actions for the future success of the firm. However, the opponents believe that the mechanism of earnings expectation pressure is necessary to focus the incentives of management and provide effective external monitoring of their actions (e.g., Jensen & Meckling, 1976). However, the current debate is mainly based on anecdotal evidence and interviews or surveys with managers (e.g., Abegglen & Stalk, 1985; Useem, 1996; McKinsey & Company, 2006). Although there are already some theoretical models discussing this effect (e.g., Stein, 1989; Rotemberg & Scharfstein, 1990), there is limited systematic empirical evidence about the effect of earnings pressure on firms' long-term strategy and performance.
Earnings Pressure and Strategic Investment
Strategic investment is defined as future-oriented investment expenditures that reflect managerial decisions about long-term strategic direction (Sanders and Carpenter, 2003; Litov et al., 2009; Bushee, 1998; Maritan, 2001; Kotha and Nair, 1995; Benner and Ranganathan, 2011). Note that these "strategic investments" are not always considered to be investments in the accounting sense. They are, in fact, considered to be current expenses, even though they may have long-term performance implications. Strategic investment can translates into lower future production costs, increased product differentiation (Porter, 1980, 1985), or heightened entry barriers (Spence, 1977; Rumelt, 1984). Typically, strategic investment involve inter-temporal trade-offs, whereby firms may sacrifice earnings in the short term to establish its competitive position in the long run. Due to the path-dependency nature of strategic assets accumulation process (Dierickx and Cool, 1989), a consistent investment to build up these assets or positions can be critical for the firm's success in the long-run.
Drawing on insights from the behavioral theory of the firm (BTOF), we argue that earnings pressure has a detrimental effect on strategic investment, due to the misalignment of causal ambiguity between earnings pressure and strategic investment. Earnings pressure and strategic investment vary substantially in terms of the clarity of action-outcome linkage. For earnings pressure, firms receive extremely quick signals from financial markets if it fails to beat or meat analyst earnings forecasts. On the other hand, firm action on strategic investment may provide little immediate signal. As strategic investment is characterized with high levels of causal ambiguity, outcomes of such investments tend to be delayed and cannot be traced back to specific organizational events or parameters (Levinthal & March, 1993; Rahmandad, 2009; Rahmandad et al., 2009). When the action-outcome linkage is not immediately available, it requires more cognitive process (Glynn et al, 1994; Walsh, 1995) and slow development of new mental maps to impute the value of such investments (Gibson et al, 1997). Thus, in the event of earnings pressure, managers will be more attentive to short-term approaches of boosting earnings at the expenses of long-term oriented strategic investment.
Prior research suggests that managers are responsive to earnings pressure with various short-term oriented approaches ways to meet or beat earnings forecasts. Responses include managing analysts' expectations by providing earnings guidance and communicating with stock analysts (Bernhardt and Campello, 2007), and engaging in "creative accounting" by shifting discretionary accruals (Degeorge et al., 1999). Survey results also suggests that managers respond to analysts' earnings forecasts by engaging in "real earnings management" - i.e., retooling real business decisions such as the amount of R&D or advertising expenses, timing of new investment projects - that will impact a focal firm's explorative patience and long-run competitive position (Graham et al., 2005). All of this creates situation where the firm that focuses on addressing earnings pressure at the expenses of strategic investment can be rewarded in the financial market, and by doing so pressures other firms to follow it. A focus on immediate solutions to earnings pressure can lead to the reduction of strategic investment, which come at the expenses of firm competitive advantage in the long run, as reflected in a recent comment by the Founder of Amazon.com, Jeff Bezos:
"If everything you do needs to work on a three-year time horizon, then you're competing against a lot of people. But if you're willing to invest on a seven-year time horizon, you're now competing against a fraction of those people, because very few companies are willing to do that."(Jeff Bezos, Wired, 11/13/2011)
To compete effectively in the product market, firms need to build and accumulate resources and sustainable positions (Rumelt, Schendel, and Teece, 1994; Dierickx and Cool, 1989). But such a strategy requires strategic investment and may limit the profit firms can make in the current period. When earnings pressure stays low, strategic investment (e.g., new projects) are more likely to go through the budget approval processes; when earnings pressure stays high, budget would be less accessible for strategic investment and firms will be more focused on what they "can afford to spend" (Cyert and March, 1963, p272). As a consequence, when managers face pressure to meet or beat analysts' forecasts, they are incentivized to increase current earnings at the expense of long-run strategic investment efforts. Consistent with this line of argument, recent studies - including experiments (Bhojraj & Libby, 2005), surveys (Graham et al., 2005), and large-sample empirical studies of financial statements (e.g., Roychowdhury, 2006; Cohen, Dey, and Lys, 2008) - all point to evidence that earnings pressure drove managers to reduce long-term strategic investments in order to meet analysts' earnings forecasts and other important earnings benchmarks. In particular, Cohen, Mashruwala and Zach (2010) found that firms are likely to cut advertising expenses in order to meet or beat important earnings targets such as positive earnings numbers and earnings increases. Zhang and Gimeno (2010) found that in the U.S. electricity industry, firms under earnings pressure tended to restrict output, especially when market structure and competitor characteristics allowed them to exercise market power.
In line with this argument, previous research on myopic corporate behavior has tended to focus on the inter-temporal trade-offs due to long-term investments, particularly if those investments involve current (i.e., non-capitalized) expenses that reduce current earnings and result in future intangible assets that are difficult to measure by analysts (Stein, 1989). In these situations, firms can easily "borrow" from future earnings by reducing those investments. For example, a related research stream has linked particular types of institutional investor ownership to levels of R&D investments (e.g., Bushee, 1998; David, Hitt & Gimeno, 2001; Hoskisson, Hitt, Johnson & Grossman, 2002).
In summary, when firms face pressure to meet analysts' earnings forecasts, they are forced to reduce the intensity of strategic investment and to engage in less strategic investment. For example, firms can reduce their R&D, advertising, and capital expenditure for the current period since these reductions can help improve current period performance immediately, although they may have negative consequence on firms' competitiveness in product market in the future (Porter, 1992). Thus,
Hypothesis 1: Earnings pressure will negatively influence a firm's strategic investment level.
Earnings Pressure and Different Performance Feedback
Having posited that the misaligned feedback between short-term earnings pressure and long-term strategic investment, we now consider how the effect of earnings pressure on strategic investment can be accelerated or mitigated by different organizational goals and performance feedback.
A simple feedback cycle lies at the heart of the behavioral theory of the firm (March & Olsen, 1976). The cycle has three steps. First, a firm takes an action. Second, that action produces an outcome. Third, if the outcome exceeds the firm's goals, the chances increase that the firm will repeat the action in the future; if the outcome is below goals, the firm will search for alterative actions (Cyert & March, 1963; Greve, 2003). Organizations are thought to have a wide range of goals, including profitability, sales, and production (Cyert & March, 1963; Greve, 2008). Some goals are used to assess organizational performance, and others are introduced through the efforts of stakeholders and interest groups to persuade organizations to pursue their interests (Donaldson & Preston, 1995; Hoffman, 1999; Greve, 2008). Much of the extant empirical literature on aspirations focuses on aspirations derived from historical firm and industry aggregate financial performance (e.g., Bromiley 1991; Greve, 2003). Organizational goals and performance feedback, however, take many forms across different industry contexts, with a scope and complexity level far beyond the single dimension of financial performance (Cyert & March, 1963). For example, any corporate budget contains many different aspiration levels, including aspirations for sales, inventory, production costs, etc. In our setting, we focus on two types of organizational goals and performance feedback: stock market performance and product market performance. We argue that the two types of goals and performance feedback will exert opposite moderating effects on the impact of earnings pressure on strategic investment.
Feedback on a firm's stock market performance is important when the firm is making decisions about long-term strategic investment in the face of earnings pressure. With negative feedback of its stock decline, a focal firm will be further constrained of allocating resources for the purpose of distant, future earnings. We argue that the negative effect of a firm's earnings pressure on strategic investment will be reinforced by the firm's negative feedback from stock market performance. In the face of significant stock price decline, managers will be incentivized to avoid negative earnings surprise by reducing their investments in strategic activity, even if that involves higher risk of declining performance in the long run (Caves et al., 1984). In contrast, if the company's stock is performing well, managers will be less responsive to the potential impacts of earnings surprise; as a result, they have more freedom to sacrifice some short-term earnings in order to preempt entry and rival expansion by signaling or reputation (Milgrom and Roberts, 1982). Therefore, this logic suggests that firms experiencing bigger stock price decline in the past will reduce their strategic investment more when facing earnings pressure, all else being equal.
Consistent with this line of argument, a stream of research on investor myopia suggests that negative feedback from stock market performance can spur short-termism in mangers and thus suppress longer term investments, such as R&D (Hansen and Hill, 1991; Wahal and McConnell, 2000; Baysinger, Kosnik, and Turk, 1991) and other strategic investments where payoffs are more long-term oriented (e.g., Souder and Shaver, 2010; Wahal and McConnell, 2000). In setting where managers are favorable toward long-term investments in their firms, the negative feedback from a firms' stock market performance can impose myopic pressures on managerial behavior and thus exacerbate the negative impact of earnings pressure on strategic investment (e.g., Graves, 1988; Laverty, 1996). For example, Sanders and Carpenter (2003) describe that managers are sensitive to negative feedback from stock decline, which further drives short-term oriented actions such as stock repurchases at the expenses of long-term R&D investments.
In sum, we argue that earnings pressure may further disrupt a firm's strategic investment to the extent that the firm also experiences negative feedback from stock market performance. In our setting, analyst forecasts therefore are more likely to be more impactful on a focal firm's uncertain long-term investments when the firm's stock performance declines in the previous period. Thus, we predict
Hypothesis 2: The negative effect of earnings pressure on a firm's strategic investment is stronger when the firm experience bigger stock price declines in previous periods.
The impact of earnings pressure on strategic investment can also be moderated by feedback from product market performance. Product market performance is defined as xxxx (xxxx). With negative feedback of its performance on product market, managers will shift attention from short-term actions of meeting or beating analyst forecasts to its long-term competitive position, and thus mitigate the negative impact of the focal firm's earnings pressure on strategic investment. This logic suggests that the two types of performance feedback will play opposite moderating roles in the effect of earnings pressure on strategic investment.
Managers have growth goals, and failure to meet their growth goals in product markets motivates managers to undertake risky strategies such as strategic investments. Negative feedback on product market performance thus serves as an important motivator for breaking the constraints of earnings pressure on strategic investment. When firms experience healthy growth in product markets, managers typically tend to be satisfied with their current growth levels, and hence are likely to avoid unnecessary risk associated with uncertain strategic investment (March and Shapira, 1987). Conversely, when firms experience poor growth in product markets, managers become more willing to undertake high-risk strategies to boost their product market position even in the face of short-term earnings pressure (Greve, 2008). Prior research on organizational risk-taking behavior has provided ample evidence that managers undertake riskier strategies when their current strategies do not provide desired performance outcomes such as healthy growth (Bromiley, 1991; Lant, Milliken, and Batra, 1992; Greve, 2003).
The performance outcome of strategic investment depends on many factors, such as the response by the competitors, or the time it takes for firm's competitive advantage to decay. Performance in market competition depends not only on firms' actions, but also on competitors' responses (Triole, 1988). Yet competitors may have delay when they react (Chen and MacMillan, 1992). As a result, operating performance can be boosted before competitors respond, although it may decrease with competitors' reaction. Similarly, competitive advantage can endure competitive challenges for a long period of time (Caves, Fortunato and Ghemawat, 1984). Within that period, firms may reduce strategic investment but still maintain or increase operating results. Therefore, firms may improve performance when they reduce strategic in the face of earnings pressure, even though doing so may provide opportunities for competitors to challenge or attack their competitive positions. Yet when competitors take reactions or start to threaten the advantage of the focal firm, focal firms' performance may begin to decline. Hence we argue:
Hypothesis 3: The negative effect of earnings pressure on a firm's strategic investment is weaker when it experience growth declines in previous periods
Feedback on Financial Market Performance versus Feedback on Product Market Performance
Having posited that both financial market performance and product market performance moderate the impact of short-term earnings pressure on strategic investment, we further consider interactions between the two goals and performance feedback. Within organizations, conflicting goals exist and interact (Greve, 2008). Then, in the presence of both types of goals and performance feedback, which set of performance feedback would be more predominant in terms its contingent power to the impact of earnings pressure on strategic investment? To answer this, we propose two alternative hypotheses, following logics of feedback saliency and logics of growth desperation (Greve, 2008; Kim et al., 2011).
We start with the feedback saliency argument. Forms of goals and feedback differ in saliency to managers. Prior literature suggests that, in the presence of multiple conflicting goals, firms direct their attention to salient feedback dimensions (Ocasio, 1997). To overcome information processing limitations, organizations develop "attention structures" - organizational structures that govern the allocation of attention and focus of decision-making activities (Ocasio, 1997; Simon, 1997) - to emphasize certain salient goal dimensions. Given limited resources and attention, firms will direct effort toward highly visible aspiration dimensions which implies less attention to less visible goal dimensions. This drives the firm to adapt to the salient dimensions, partially by ignoring less salient ones. Since visibility may not align with long run importance, attention may be misallocated. For example, manufacturers or restaurants know immediately if their current presentation meets customer standards on the visible features, but the impact of slightly lower quality or slight dissatisfaction with quality may not appear for years.
Feedback on salient dimensions linked directly to tangible outcomes will influence managerial behavior more than feedback on less tangible dimensions. Outcomes that relate simply and directly to the real business may have more influence than outcomes dependent on some complex (yet potentially more rigorous) analysis. Compared to financial market feedback - which is often immediate and can be tied to specific firm and market events - product market feedback are more salient. Under such high level of saliency, we argue that the moderating effect of financial market feedback will be stronger than that of product market feedback.
Furthermore, internal reward systems within organizations often reinforce salient feedback loops. That is, the same features that make some dimensions more salient also make those dimensions good candidates for reward systems. For example, firms know sales and immediate profits, but lack good measures of impact on future repute; many more firms reward managers on sales and immediate profitability than on building firm reputation. A salience-based reward system reinforces participants' emphasis on certain kinds of feedback, which will influence the direction of organizational change. Thus, we propose,
Hypothesis 4a: The negative effect of earnings pressure on strategic investment is stronger for firms with low financial market performance than for firms with low product market performance.
In contrast, a logic of "growth desperation" puts feedback on product market performance at the central stage (Kim et al., 2011). Low firm growth negatively affects the market value of a firm, often compelling shareholders to pressure managers toward adopting more growth-oriented strategies. Since strategic investment is a typical path a firm can capitalize on growth opportunities by expanding into new geographic or product markets, low growth can help mitigate the negative impact of earnings pressure on future-oriented strategic investment. Firms with low growth try to redeploy their strategic resources to attract better long-term growth opportunities. More specifically, if a firm can redeploy its assets to enter new markets, or recombine existing assets with the complementary assets of an acquired firm, it may be able to reinvigorate firm growth (Anand and Singh, 1997; Capron, Dussauge, and Mitchell, 1998). Hence, we expect firms plagued by low firm growth to be predisposed toward strategic investment, even in the face of short-term earnings pressure.
Emerging anecdotal evidence suggests that managerial desperation is a motive for action in which specific conditions drive managers toward inappropriate and often risky decisions (Finkelstein, 2003). Furthermore, recent theory development on managerial decision-making suggests that managers who are under growth pressure tend to exhibit more extreme strategic behaviors (Hambrick, Finkelstein, and Mooney, 2005). Research in the behavioral theory of the firm supports these ideas. For example, Greve (2008) suggested that firms with size below desired target size are more likely to take on risk to achieve growth. In another study, he found that radio stations are more likely to change their broadcasting format - a risky strategic move - when their market position is weak (Greve, 1998). These studies imply that desperate managers in a firm faced with a difficult situation (e.g., low growth) may become more willing to engage in risky investments and adopt managerial behaviors, even in the face of significant earnings pressure. Thus, we propose
Hypothesis 4b: The negative effect of earnings pressure on strategic investment is stronger for firms with low product market performance than for firms with low financial market performance.
