Analysts' Reaction to IT Fashion Engagement

Following the question of what happens to firms that chase fashionable information technologies (IT), this study examines financial analysts' reaction to firms' IT fashion engagement (ITFE) within a twenty-year period, including the dot-com era. Drawing on prior research and institutional theory, I argue and find empirical evidence that analysts—a known source of institutional pressure and an important gatekeeper in the capital markets—react to ITFE with more or less favorable stock recommendations contingent on their ability to reduce the associated uncertainty and information asymmetries. While analysts' reaction to ITFE is unfavorable on average, this association is strengthened for low levels of analyst coverage and high levels of firm complexity—both aggravating uncertainty and information asymmetries. Lastly, I find that the dot-com narrative, entailing a positive sentiment toward fashionable IT, is associated with significantly more favorable recommendations toward ITFE within the pre-dot-com era.