When a thousand words are (not) enough: an empirical study of the relationship between firm performance and attention to shareholders.

Autorde Mesquita Ferreira, Luciana Carvalho
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Introduction

Since the introduction of resource dependence theory (RDT) (Pfeffer & Salancik, 1978), scholars interested in understanding the linkages between organizations and their environment widely used RDT, and stakeholder management scholars have likewise followed suit. The core of RDT lies in the idea that organizations are not self-sufficient and, as a result, they must manage their interdependences with shareholders and stakeholders to gain access and control over required resources and information (Pfeffer & Salancik, 1978). Resource dependence theory is thus a likely candidate for providing the conceptual backbone for stakeholder theory, as it offers constructs and working hypotheses relevant for the analysis of firm strategies and performance under conditions of (partial) dependence on external stakeholder groups.

But whereas RDT can fruitfully be used to explain phenomena pertinent to stakeholder management, such as co-optation through board structures (Pfeffer & Salancik, 1978) and the prioritization of stakeholders (Mitchell, Agle, & Wood, 1997), the theory is limited in at least two ways. First, RDT has been criticized for being a somewhat deterministic theory, focused predominantly on how firms respond to environmental constraints. Second, RDT focuses predominantly on the task environment and on task-related dependencies, whereas institutional environments are also a source of pressure on organizations. Together, these problems impose limitations to the explanatory power of RDT (Casciaro & Piskorski, 2005).

Additionally, RDT does not provide an explanation of how organizations cope with the multiplicity of interdependences, or as Finkelstein (1997) puts it, what comes first. In spite of recognizing the multiplicity of internal and external environmental stimuli affecting organizations and also the numbered constraints on organizational behavior such as physical realities, social influences, personal preferences and cognitive capacities (Pfeffer & Salancik, 1978), a resource dependence approach focuses its explanation of the linkage between environments and organizations on the presence of structures and information systems as enablers of environment enactment, not exploring internal linkages which also account for a full understanding of organizational moves. Therefore, stakeholder theory could benefit considerably from further reinforcement by different theoretical perspectives, to offset and complement its traditional indebtedness to RDT.

In this paper, we propose the attention-based view (ABV) as a promising complementary framework for the analysis of instrumental stakeholder relationships. While the ABV is also in an early stage of development (Sonpar & Golden-Biddle, 2008), it does contain some interesting features that could greatly advance stakeholder management. First, it considers both environmental and organizational factors, making it less of a black-box theory than RDT. Second, ABV is decidedly a managerial theory, as it is rooted in an analysis of managerial roles as an explanation for organizational outcomes. An ABV perspective on organizational moves suggests what decision makers do depends on their focus of attention whereas RDT say what decision makers do depends on the interdependences affecting the focal organization. In both perspectives, attention structures are central determinants for organizational behavior because they provide cues to decision makers on how to respond to environmental stimuli (Ocasio, 1997; Pfeffer & Salancik, 1978). However, an attention based view of the firm offers a linkage and provides an explanation on how organizational structures are related to managerial cognition (Barnett, 2008); a missing link in RDT.

The aim of this study is to test the explanatory power of the attention-based view of the firm against resource dependence theory. By proposing a model of attention to shareholders based on assumptions of both ABV and RDT, our study provides four contributions. First, we provide a concurrent test of explanations for attention to shareholders based on a resource dependence perspective and attention-based view using content analyzed data from letters to shareholders. This source of data has been widely used in research about organizational attention (Abrahamson & Hambrick, 1997; Cho & Hambrick, 2006; D'Aveni & McMillan, 1990; Levy, 2005; Yadav, Prabhu, & Chandy, 2007) but not necessarily in research testing RDT. We also contribute to the literature on impression management providing an alternative explanation for the content of public accounts of organizations. Although annual reports in general, and letters to shareholders more specifically, can be seen as a privileged communication channel to manage external impressions about organizations (Abrahamson & Park, 1994; Staw, McKechnie, & Puffer, 1983) these channels are also relevant governance channels which reflect important concrete and contextual aspects of the organization's attention process (Ocasio & Joseph, 2005, 2006). Third, we contribute to the development of the ABV by providing an explanation for some of the mechanisms "of how the firm as a cultural and social system is shaped by the environment of action" (Ocasio, 1997, p. 193), which are not explicitly addressed in the original model. Finally, we also add to the literature of attention by providing empirical evidence and a theoretical explanation of the almost unexplored relationship between financial performance and organizational attention.

The paper is structured as follows. In the next section we present our conceptual model combining RDT and ABV to explain firms' attention to stakeholders. We believe these two literature streams can advance studies about stakeholder management. Following our theory and hypotheses section, we introduce and explain our methodological approach discussing our primary data source (i.e., content analysis of 313 letters to shareholders, derived from 410 public listed firms in 24 countries), sample, variables and statistical model. Next, we present and discuss the results of the empirical tests of the proposed conceptual model. Lastly, we discuss our findings revealing its implications, considering some of the study limitations and highlighting its contributions.

Theory and Hypotheses

Resource dependence theory develops from the principle that organizations are unable to produce and generate all necessary resources for their operations and survival (Emerson, 1962; Pfeffer & Salancik, 1978; Thompson, 1967). As a consequence, firms enter in exchange relationships to obtain necessary resources. On the one hand, these transactions with resource providers guarantee firms' operations. On the other hand, however, they increase external dependencies. Thus, dependency is the basic concept available to researchers trying to explain organizational outcomes.

According to this literature, organizations are embedded in environments that are stocks of resources (White, 1974) and dependence is the basic concept available to researchers who try to explain organizational outcomes. It is the inability of firms to generate their factors for production that forces them to engage in transactions with other organizations, creating external dependencies which ultimately explain phenomena like joint ventures, mergers, board of director composition, boards interlocks and executive succession (Pfeffer & Salancik, 1978). The lack of resources can vary from raw materials and equipments to skills and knowledge and the higher the need for a certain resource, the higher the likelihood of exchange.

An important aspect of resource dependence theory is its emphasis on the contingent nature of external dependencies. According to RDT, the value of a resource is not inherent, but given by the exchange relationship. Thus, the value of a resource is a direct function of its utility to a firm's operations, and the extent to which that resource is necessary for the firm to operate and survive. These two interrelated aspects of RDT suggest its close affinity with stakeholder theory since both theories focus on the external interdependencies and criticality of resources of the focal firm. However, whereas instrumental stakeholder theory favors the managers' role (Jones, 1995), RDT framework suggests there is limited managerial discretion over the external environment. In spite of the constraints imposed on decision-making by the environment, Pfeffer (1981) identifies social construction as the ultimate role of managerial action. The boundaries created by critical dependencies to the organization limit managerial discretion (Pfeffer & Salancik, 1978). Nevertheless, resource dependence scholars suggest that managers are able to manipulate external environments and have an influence on them (Pfeffer, 1981).

Arguments in favor of the symbolic role of managerial action are in line with the attention-based view (ABV) of the firm, which suggests that organizational responses, as social constructions, are structured by organizational attention (Ocasio, 1995). Accordingly, much of what we recognize as organizational behavior reflects decision-makers' interpretations. Taking this connection between both theories as our starting point, we argue that ABV can fill in an important opening in the literature of RDT and propose a conceptual model to explain how firms attend to stakeholders. The model intends to provide a multilevel framework that considers not only managerial discretion but also internal and external mechanisms and that has the potential to advance stakeholder management.

Hypotheses: firm level antecedents

From a purely economic standpoint, antecedents of organizational attention to firms' capital providers are based on resource dependence propositions. Accordingly, organizations are more likely to pay attention to capital providers that control resources critical to organizations' operations and survival. The degree of attention...

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