Categorical Atypicality and Evaluation Accuracy: Who Make More Accurate Evaluations of Atypical Firms?

Abstract

Prior literature on market categories and identities focuses primarily on whether categorical atypicality leads to positive or negative evaluation; however, much less is known about whether the evaluation is accurate or not. While it is important forproducersto know if atypicality is penalized or rewarded,audiencesare also concerned about whether their evaluation of atypical organizations is accurate, as well as how the evaluation can be improved. To shed light on this, we first test the association between categorical atypicality and evaluation accuracy. Distinguishing au- diences in two dimensions – coverage coherence and typicality – we further theorize and examine which audiences are better able to evaluate atypical organizations. Analysing earnings forecasts for US firms, we find that analysts’ forecasts for atypical firms are not necessarily inaccurate, contrary to what prior theory would suggest. More importantly, the results show that analysts are more accurate in forecasting atypical firms when their coverages are more atypical and/or incoherent. The findings suggest that atypical and incoherent coverage enables analysts to better understand atypical firms, supporting our core conjecture of ‘unconventional audiences for atypical actors’.