Extending Upper Echelons Theory: How Evaluators Influence Signal Interpretation and Evaluation

Abstract

As one of the most influential theories in strategic management, Hambrick and Mason’s Upper Echelons Theory has yielded significant conceptual and empirical advancements linking executive characteristics and perceptions to decision-making. Specifically, work on this theory consistently shows that CEOs’ decisions are biased by personal characteristics to the benefit and detriment of firms. While this stream of research links executive decision processes to outcomes such as executive dismissals, analyst evaluations, and press coverage, surprisingly little is understood about if and whether the information CEOs convey is subject to the same filtering process by a firm’s key evaluators. Thus, in this chapter, we aim to extend Upper Echelons Theory by positing that a double filtering process occurs whereby the cognitive aids CEOs use can be informed by not only their cognitive base and values but also the characteristics and priorities of those who evaluate the nonverbal and verbal signals they send. To do so, we build on recent conceptual and empirical advancements to make a case for the decision-making biases and tendencies that influence signal interpretation by three key evaluator groups internal and external to the firm: boards of directors, financial analysts, and the media. We conclude by considering the implications of evaluators’ information filtering and how this more holistic view of Upper Echelons decision-making can enable executive teams to be strategic with the cognitive aids they use to influence evaluations.

Citation

Short, C.E. and Hubbard, T.D. (2023), "Extending Upper Echelons Theory: How Evaluators Influence Signal Interpretation and Evaluation", Sund, K.J., Galavan, R.J. and Gustafsson, R. (Ed.) Cognitive Aids in Strategy (New Horizons in Managerial and Organizational Cognition, Vol. 6), Emerald Publishing Limited, Leeds, pp. 47-64. https://doi.org/10.1108/S2397-521020230000006004