Earnings Pressure and Corporate Product Refocus
Abstract
Facing pressure to meet short-term earnings expectations, corporate managers often take actions that are perceived as value-destroying. Our study provides empirical evidence supporting an alternative view: earnings pressure can discipline managers to undertake value-enhancing actions by refocusing on the firm’s core products. Consistent with this product refocus hypothesis, we find that firms under earnings pressure reduce investment in non-core products, leading to the subsequent underperformance of these non-core products, whereas the performance of core products remains unaffected. As predicted, product refocus is stronger when managers exhibit ex ante high-level agency problems. To strengthen identification, we exploit shocks arising from analyst brokerage mergers and closures. Our study suggests a bright side of earnings pressure—it helps reduce agency-motivated product diversification.
- DOI
- 10.2308/tar-2023-0569
- Pages
- 1-37
- Language
- en
- Sources
- openalex crossref