Inconsistency across short-term and long-term oriented signals: Effect on investor reactions

Abstract

We examine how investors evaluate firms when they receive inconsistent signals with different temporal orientations—short-term signals about the firm’s status quo versus long-term signals about its prospects. We propose that shareholders react negatively to increased long-term investments, like R&D, when managers express negative sentiments about the firm’s current status. Drawing on signaling and cognitive dissonance theories, we argue that these inconsistent signals cause cognitive dissonance for investors, leading to risk-averse decisions. Analyzing public firms in China from 2008 to 2020, we find that higher R&D intensity amplifies the negative impact of management’s negative sentiment on market reaction. This effect is stronger with higher transient institutional ownership and lower managerial ownership. By focusing on signal inconsistency across different temporal frames, this study aims to better understand how investors evaluate a firm’s long-term investments in light of managers’ sentiments about the current state.