Pluralistic ignorance and the persistence of positive analyst reactions to repurchase plans

Hongquan Zhu, James D. Westphal

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

We consider how a social psychological bias referred to as pluralistic ignorance occurs among sell-side security analysts and how this bias may lead to mimetic isomorphism in analysts' reactions to the adoption of a particular organizational policy, namely stock repurchase plans. Our theory suggests why (1) there may be a systematic tendency for analysts to underestimate the extent to which other analysts share their reservations about stock repurchase plans (i.e., reservations about whether such plans reflect well on the performance prospects of adopting firms), such that (2) analysts mimic others and issue more positive earnings forecasts and stock recommendations in response to the adoption of repurchase plans despite having private reservations about whether the plans reflect well on adopting firms. We also contend that analysts are less likely to underestimate the extent to which others share their reservations about repurchase plans to the extent that they have frequent communication ties to other analysts. We test our specific hypotheses with a unique dataset that includes original survey data from a large sample of security analysts and found strong support for our theory. While prior neo- institutional research on mimetic isomorphism has primarily adopted a cognitive perspective in which actors imitate others based on their understandings of a particular policy or practice (i.e., they either take the value of the policy for granted or infer the value of the policy from others' prior decisions), this study begins to develop a more social psychological perspective on imitation wherein actors imitate others based on their biased perceptions of others' beliefs about the policy. Our theory and findings also extend perspectives on institutional persistence by explaining why constituents may continue to publicly endorse a policy despite having private reservations about the policy's efficiency benefits. In particular, we suggest that constituents may continue to respond positively to the adoption of a policy not because they assume or take-for-granted the benefits of the policy, but because they overestimate the extent to which other constituents hold this assumption. Accordingly, this study suggests a novel social psychological mechanism by which the institutional value of organizational policies is maintained.

Original languageEnglish (US)
Title of host publicationAcademy of Management 2010 Annual Meeting - Dare to Care: Passion and Compassion in Management Practice and Research, AOM 2010
StatePublished - 2010
Event70th Annual Meeting of the Academy of Management - Dare to Care: Passion and Compassion in Management Practice and Research, AOM 2010 - Montreal, QC, Canada
Duration: Aug 6 2010Aug 10 2010

Other

Other70th Annual Meeting of the Academy of Management - Dare to Care: Passion and Compassion in Management Practice and Research, AOM 2010
CountryCanada
CityMontreal, QC
Period8/6/108/10/10

Keywords

  • Corporate governance
  • Institutionalization
  • Neo-institutional theory

ASJC Scopus subject areas

  • Management of Technology and Innovation
  • Industrial relations

Fingerprint Dive into the research topics of 'Pluralistic ignorance and the persistence of positive analyst reactions to repurchase plans'. Together they form a unique fingerprint.

  • Cite this

    Zhu, H., & Westphal, J. D. (2010). Pluralistic ignorance and the persistence of positive analyst reactions to repurchase plans. In Academy of Management 2010 Annual Meeting - Dare to Care: Passion and Compassion in Management Practice and Research, AOM 2010