What Happens when Companies (don’t) Do What they Said they would? Stock Market Reactions to Strategic Integrity

• Date: 01 September 2019
• Author: Christos P. Mavis,Sascha L. Schmidt,Kai Steinbock,Christian Landau,Ansgar Richter,Tony Simons
• DOI: http://doi.org/10.1111/emre.12175
• Published date: 01 September 2019

What Happens when Companies (don’t) Do

What they Said they would? Stock Market

Reactions to Strategic Integrity

CHRISTOS P. MAVIS,

1

ANSGAR RICHTER,

1

CHRISTIAN LANDAU,

2

SASCHA L. SCHMIDT,

3

TONY SIMONS

4

and KAI STEINBOCK

5

1

Surrey Business School, University of Surrey,Guildford, United Kingdom

2

EBS Business School, EBS University, Oestrich-Winkel, Germany

3

Center for Sports and Management, WHU –Otto Beisheim School of Management, Düsseldorf, Germany

4

Cornell University,College of Business/School of Hotel Administration, Ithaca, NY, USA

5

Siemens Management,Munich, Germany

Literatureon the ‘power of words’has emphasizedthe importance of a firm’s corporatecommunication as a source

of legitimacy and reputation in the eyes of its stakeholders. We argue thatit is not just the content or style of a firm’s

communication about its strategy, but also the alignment between this communication and its subsequent strategic

actions that help build legitimacy among stakeholders and creating firm performance. We introduce the

organization-level construct of ‘strategic integrity’to capture the notion of alignment between a firm’s strategy

communication and its subsequent strategic actions. We investigate the importance of strategic integrity using the

case of the Germanpharmaceuticals firm Bayer AG in the contextof its portfolio restructuring.The results of an event

study of 80 acquisitions/divestments indicate that stockmarkets react positively to strategic integrity.

Keywords: strategic integrity; legitimacy; strategy communication; acquisitions/divestments; event study

Introduction

The emerging scho ol of ‘rhetorical institutionalism’

suggests that communication plays a central role in the

process through which economic actors establish and

maintain legitimacy (Green and Li, 2011; Harmon

et al., 2015; Hoefer and Green, 2016). Building on the

insight by institutional theorists that communication

shapes legitimacy formation (Suddaby and Greenwood,

2005; Golant and Sillince, 2007; Suddaby, 2010),

researchers have identified rhetorical strategies including

framing (Gray et al., 2015), narratives (Andersen and

Rask, 2014) and tropes (Etzion and Ferraro, 2010) as

means to establish perceived legitimacy (Bitektine and

Haack, 2015).

At the same time, the literature on rhetorical

institutionalism has paid scant attention to the argument

that mere rhetoric is rarely enough in order for economic

actors to sustain their reputation and the legitimacy

attributed to them, unless it is backed by concrete action.

Simons, (1999, 2002a, b) has introduced the notion of

behavioral integrity, defined as the extent to which an

individual’s communication regarding her intentions are

matched by her subsequent actions and behaviors. Recent

meta-analytical work has attested to the positive effects of

behavioral integrity on leader-follower relationships and

managerial effectiveness (Simons et al., 2015).However,

empirical resea rch on behavioral integrity has studied this

concept exclusively on the level of individual human

actors, whereasits importance in the case of organizations

has largely escaped attention.

In this paper, we follow three avenues in order to help

making a contribution for overcome these limitations.

First, we develop the notion of ‘strategic integrity’as a

novel construct to describe the pattern of alignment

between a firm’s communicated strategy and its

subsequent strategic actions. The notion of strategic

integrity thus provides a middle ground between

approachesthat emphasize communication (‘words’) over

actions (‘deeds’), and those that see the order of priority

Correspondence: ChristosP. Mavis, SurreyBusiness School, Universityof

Surrey, Guildford, GU2 7XH, United Kingdom,. Tel.: +44 1483686572.

E-mail c.mavis@surrey.ac.uk

DOI: 10.1111/emre.12175

©2018 The Authors European Management Review published by John Wiley & Sons Ltd on behalf of European

Academy of Management (EURAM)

This is an open access article under the terms of the Creative Commons Attribution License, which permits use,

distribution and reproduction in any medium, provided the original work is properly cited.

European Management Review, Vol. 16, –, (2019)

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the other way around. Strategic integrity, as defined here,

does not relateto the question of whether firms’intentions

or actions are‘good’from an ethical or a competitivepoint

of view. Instead, it focuses on whether its actions are in

line with its stated intentions, such that the latter can be

taken as a reliable guide for the former.

Second, we explicate the notion of strategic integrity in

the context of a firm’s portfolio restructuring actions.

Acquisitions and divestitures involve highly tangible and

visible resource commitments through which firms

implement their strategic objectiveson the corporate level

(Noda and Bower, 1996).We offer theory suggesting that

strategic integrity in the context of corporate restructuring

will lead shareholders –a stakeholder group that has an

acute interest in the firm’s corporate strategy –to attribute

a reputation for trustworthiness and reliability to the firm,

thus raising their evaluation of the firm concerned.

Third, we present the case of Bayer, a German

chemicals and pharmaceuticals company, in order to

explore shareho lders’reactions to strategic integrity

empirically. We propose a measure of strategic integrity

involving secondary data and conduct an event study to

assess Bayer’s strategic integrity. Between 1999 and

2006, Bayer conducted a large-scale restructuring of its

business portfolio in the context of its move away from

its traditional chemicals business towards a greater focus

on its healthcare and agriculture divisions (Bayer, 2016).

Our event study analysis of 80 corporate transactions

shows that those resource allocation decisions

characterized by strategic integrity carry positive

abnormal returns, implying that the construct of strategic

integrity is of empirical relevance.

In the following, we review the literature on the

importance of strategy communication for organizational

legitimacy from the perspective of institutional theory

and provide a critique of this perspective. We then

develop the construct of strategic integrity, and explicate

it in the specific context of Bayer’s communication and

corporate restructuring activities. We develop a measure

for strategic integrity and test its implications for capital

market valuation. We conclude by discussing of our

contribution and the limitations of our work, and provide

directions for future research on strategic integrity.

Literature review

Institutional perspectives on legitimacy and corporate

communication

Institutional theory proposes that firms operate within a

social framework of norms, values and beliefs about

appropriate and acceptable economic behavior (DiMa ggio

and Powell, 1983; Scott,1987; Deephouse and Suchman,

2008). Specifically, firms require legitimacy, defined as

‘the generalized perception or assumption that the

actions of an entity are desirable, or appropriate within

some constructed system of norms, values, beliefs

and definitions’(Suchman, 1995: 574). A firm cannot

claim legitimacy; it is socially constructed (Kostova and

Zaheer, 1999) and ascribed to the organization by its

stakeholders (Massey, 2001). Legitimacy enables an

organization to maintain the willingness of its

stakeholders to provide it with essential resources

(Palazzoand Scherer, 2006). Empirical researchhas found

legitimacy to enhance stakeholder support (Zuckerman,

2000; Choi and Shepherd, 2005) and firm performance

(e.g., Choi and Wang, 2009).

The strategic approach to legitimacy highlights the

capacity of an organization to influence the propensity

of its key stakeholders to ascribe legitimacy to it, through

passive compliance or active manipulation (Deephouse

and Suchman, 2008). Since legitimacy can have many

sources with different expectations and e valuation

standards (Lamin and Zaheer, 2012), stakeholder

heterogeneity tends to complicate gaining legitimacy

(Prottas, 2013).

In recent years, a growing body of literature from the

‘rhetorical institutionalism’perspective has addressed

the relevance of communication and rhetoric –the skilled

use of language for persuasion (Covaleski et al., 2003) –

in the legitimization process (Suddaby and Greenwood,

2005; Harmon et al., 2015). A related stream of literature

emphasizes the role of discourse and of particular

discursive strategies for building legitimacy (Phillips

et al., 2004; Vaara et al., 2006; Vaara and Monin, 2010;

Lefsrud and Meyer, 2012; Joutsenvirta and Vaara,

2015). Empirical research has found framing (Fiss and

Zajac, 2006; Lefsrud and Meyer, 2012; Gray et al.,

2015), narratives (Golant and Sillince, 2007; Andersen

and Rask, 2014), and tropes to influence legitimacy

formation (Etzion and Ferraro, 2010). Cornelissen et al.

(2015) have calledfor putting communication at the heart

of institutional theory.

The literature on rhetorical institutionalism ties in

with the argument that corporate communication plays a

key role in managing and influencing stakeholders

(Cornelissenet al., 2006; Neill, 2015). By communicating

with their stakeholders, firms act as sense givers (Gioia

and Chittipeddi, 1991), helping them to build reputation,

trust, credibility, and ultimately legitimacy among

stakeholders (Pfeffer and Pfeffer, 1981; Suchman, 1995;

Stephens et al.,2005; Erickson et al., 2011). For example,

Zajac and Westphal (2004) found that communication

about an action enhanced the creation of legitimacy for

that action.

As organizations d efine specific leg itimization

strategies for their various stakeholder groups, they need

to adjust their communication approaches accordingly

(Massey, 2001). A significant body of literature exists

C.P. Mavis et al.

©2018 The Authors European Management Review published by John Wiley & Sons Ltd on behalf of European

Academy of Management (EURAM)

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