Balancing Multiple Goals: The Effects of Performance Shortfalls Relative to Aspirations vs. Analysts' Earnings Forecasts

Abstract

Research commonly assumes that performance gap relative to aspirations (manifested in the difference between a firm's actual ROA and its prior ROA as a referent) exerts a similar influence on organizational change as the performance gap relative to analysts’ earnings forecasts (reflected in the difference between a firm's actual earnings and earnings forecasts as a referent). However, these distinct types of referents from different sources are conceptually unique and operate differently, which could give rise to dissimilar behaviours. Because corporate performance information can emanate internally from agency‐driven firms and externally from financial analysts, we examine both in a unified framework. To facilitate a deeper understanding of these relationships, we investigate how alternate income streams from business unit (BU) performance at a lower level in the organizational structure moderate the way corporate managers remedy corporate performance shortfalls at a higher level. Our study contributes to the behavioural theory by examining distinct influences of corporate performance goals derived from internally‐ versus externally imposed referents and their interactions with BU performance on new market entry activities. Empirical evidence from a sample of multiunit firms publicly listed in the information and communication technology (ICT) sector over the period 1998–2016 supported the hypotheses.