Academy of Management Journal 2012, Vol. 55, No. 1, 213–233. http://dx.doi.org/10.5465/amj.2009.0530

OFFSETTING ILLEGITIMACY? HOW PRESSURES FROM SECURITIES ANALYSTS INFLUENCE INCUMBENTS IN THE FACE OF NEW TECHNOLOGIES
MARY J. BENNER University of Minnesota RAM RANGANATHAN University of Pennsylvania
We study how analysts’ recommendations affect firms’ strategies during radical technological shifts. We find, from our study of firms in three industries undergoing technological change, that analysts’ recommendations trigger changes in strategic investments during periods of uncertain technological change. We also find that firms that make high investments despite negative analysts’ recommendations announce a higher value of share repurchases, an action that may offset the growing illegitimacy of these increased investments by signaling alignment with shareholders’ interests. Radical technological changes provide a source of exogenous variation that contributes to explanation of how firms balance technological pressures for adaptation and institutional pressures for legitimacy.

The challenges and opportunities for firms faced with technological changes in their environments have been documented in a large body of organization and strategy research (e.g., Agarwal & Helfat, 2009; Christensen & Bower, 1996; Cooper & Smith, 1992; Henderson & Clark, 1990; Tushman & Anderson, 1986). Prior research has explored the difficulties firms face developing the new knowledge and capabilities required to respond to these major environmental shifts. This work has largely focused on internal sources of organizational or managerial inertia, such as rigid routines and structures (Henderson & Clark, 1990; Leonard-Barton, 1992), difficulty maintaining exploratory innovation under pressures for greater efficiency (e.g., Benner & Tushman, 2002;

We thank Associate Editor Gerry Sanders and