The Categorical Imperative: Securities Analysts and the Legitimacy Discount

This paper explores the social processes that underlie conformity with legitimate systems of classification. I address two weaknesses in research on such isomorphism: a failure to demonstrate that deviation from accepted practice generates penalties; and a neglect of the audience that metes out such punishment. In particular, a focus on a ‘mediated’ market, one that is significantly influenced by product critics, illuminates such processes. In such markets, critics tend to specialize by product category. Failure to attract reviews by the critics who follow a product’s intended category thus signals a mismatch between the product identity promoted by the seller and that attributed to it by the market. Such a product identity promoted by the seller and that attributed to it by the market. Such a product should thus attract weaker demand. I test this proposition by modeling the association between price and critical coverage in corporate securities markets. In such markets, corporations are the products, industries are the product categories, and Wall Street securities analysts are the product critics. In an analysis of American firms from 1985-1994, I demonstrate that firms trade at a discount when they do not obtain coverage from the analysts who follow their industries. This result has implications for the study of role conformity, market structure, and structural theory. In addition, the discrepancy between price and value shown here challenges prevailing theories of capital markets.