The Categorical Imperative: Securities Analysts and the Illegitimacy Discount

TLDR

In markets heavily mediated by product critics, penalties for illegitimate role performance are evident. The study examines how the absence of coverage by industry‑specialized securities analysts signals product illegitimacy and depresses demand. The authors test this claim using data on public U.S. firms from 1985 to 1994.

Abstract

This article explores the social processes that produce penalties for illegitimate role performance. It is proposed that such penalties are illuminated in markets that are significantly mediated by product critics. In particular, it is argued that failure to gain reviews by the critics who specialize in a product's intended category reflects confusion over the product's identity and that such illegitimacy should depress demand. The validity of this assertion is tested among public American firms in the stock market over the years 1985–94. It is shown that the stock price of an American firm was discounted to the extent that the firm was not covered by the securities analysts who specialized in its industries. This analysis holds implications for the study of role conformity in both market and nonmarket settings and adds sociological insight to the recent “behavioral” critique of the prevailing “efficient‐market” perspective on capital markets.