When Do Secondary Stakeholder Attacks Matter to Financial Analysts? The Role of Analysts’ Political Ideology

Secondary stakeholders increasingly seek to discipline firms by attacking morally contested corporate actions. In this paper, we focus on a specific and consequential outcome of their attacks: shaping financial analysts’ recommendations. Drawing on research on moral evaluations and political ideology, we theorize that secondary stakeholder attacks increase analysts’ likelihood of issuing ‘sell’ recommendations, but that this effect is stronger among liberal analysts compared to their conservative peers. We further argue that this ideological divergence is amplified when analysts have greater reputational discretion to issue recommendations based on moral values, and when attacks concern violations that are less intrinsic to the firm’s core business and therefore more unexpected. We test these arguments using a novel dataset combining hand-collected information on analysts’ political ideology with data on secondary stakeholder attacks targeting publicly traded defense firms in the U.S. from 1998 to 2017. Our results support the theoretical predictions and further show that liberal analysts’ stronger responses to SSAs do not translate into superior returns. These findings also help explain the heterogeneous effectiveness of SSAs in capital markets.