How Companies Use Strategically Timed Announcements to Confuse the Market

On October 23, 1996, the day AT&T announced that John Walter, an industry outsider, would be named CEO, the company’s market valuation dropped by $4 billion. In his book Searching for a Corporate Savior, Rakesh Khurana at Harvard Business School noted that this negative market reaction became a self-fulfilling prophecy, causing the board of directors and other top executives to lose confidence in Walter, and leading to his dismissal only nine months after assuming office.

Stock market reactions are often used to judge whether a firm’s actions are successful. How shareholders react to a big organizational announcement, such as the appointment of a new CEO or a large acquisition, can have a lingering impact on that event. As a result, firms try to anticipate and manage market reactions to major company news by releasing other important information, or “strategic noise,” around the same time.

In a study of 601 firms that we and our coauthor Mason Carpenter conducted in 2011, we found that before announcing the appointment of a new CEO, organizational leaders try to avoid the kind of clear negative reaction that so disadvantaged Walter. Companies were much more likely to make important announcements (both positive and negative) in the days surrounding a CEO succession than in the previous few months.

Our findings suggest that by announcing a new CEO appointment alongside other important news, such as the firm’s annual earnings announcement or a change in its dividend policy, it becomes harder to point to the immediate stock market reaction as being diagnostic of how shareholders felt about the new CEO. In other words, if the reaction is good, then the firm can use that as an example of the market embracing the new CEO. But if the reaction is bad, the firm can spin it as being related to the other news announced simultaneously. The strategic noise gives the firm and the new CEO plausible deniability. Interviews with board members confirmed this idea.

Since then, one of us (Scott Graffin) and coauthors have performed a second study to examine whether a firm’s strategic noise is powerful enough to actually change the market’s reaction to big announcements such as acquisitions. A great deal of researchsuggests that, on average and over time, shareholders generally react negatively when a firm announces it has acquired another firm. For instance, the market reacted quickly and negatively when Google announced its purchase of Android in 2005, even though the deal eventually turned into a great success.

In light of this, we hypothesized that leaders would anticipate this negative reaction and actively work to reduce it or make it positive. So we expected firm leaders would simultaneously announce unrelated positive news in an effort to positively influence the market reaction to its acquisition announcement. We tested our ideas using a sample of roughly 800 acquisitions in the U.S., and the results were recently published in the Academy of Management Journal.

Consistent with prior research, we found that there was a -1.4% drop in stock value for firms immediately following an acquisition announcement. We also saw that firms were 482% more likely to announce a significant positive event (e.g., beating an earnings forecast or increasing dividends) at the same time they released the acquisition news than in the months leading up to the announcement. But firms were also 40% less likely to announce a significant negative event (e.g., missing earnings or a product recall) than they were in the days leading up to the announcement. These results confirmed and extended the first study, in that firms tried to prop up the stock market reaction to acquisition announcements.

We also found that these positive announcements influenced the market reaction around the time of the acquisition announcement. In fact, if a firm released two positive announcements, the negative market reaction to the average acquisition was reduced from -1.4% to -0.8%, which in the sample we studied is worth about $246 million in market value. So a firm could temper the negative reaction by almost a quarter of a billion dollars if it released two other pieces of positive news around the same time.

What we have learned from these two studies is that firms are not sitting around passively waiting for the market to react to their actions. Rather, they are highly conscious of how the market might react to what they do and proactively try to take steps to influence and manage those reactions.

Firms may also attempt this sort of approach when it comes to earnings releases, new product announcements, the announcement of pending lawsuits, or any instance where the firm knows about an important event in advance. Sometimes their goal may simply be to muddy the waters so corporate leaders can interpret the market’s reaction in a way that is more beneficial to the firm. Or they may actively try to change the market reaction, even if the best they can do is to reduce the size of a negative reaction. Either way, since customers and investors use stock market reactions to interpret organizational outcomes, it’s important to realize that firms may have had some influence over them.

Harvard Business Review