Have you ever noticed how talkative many CEOs can be, and how quickly they seize an opportunity to wax lyrical about their organisation, its products and services, and the markets it operates in? You might think some CEOs have sizeable egos that need to be maintained by seeing themselves featured in prominent media outlets. You might be right.

But there’s something else going on as well, and it matters because of how the stock market determines firms’ valuations. In our research published in Organization Science, my co-author Sang Won Han from Sungkyunkwan University and I examine the relationship between how organisations portray themselves and how they’re understood by others, as well as the ways firms can use self-description to their advantage.

Differentiation vs. conformity

Organisations tend to want to stand out and define themselves on their own terms, but they can also benefit from meeting the expectations of outsiders. That means navigating a persistent tension between being distinctive and fitting in. There’s a duality at the heart of this process: Firms describe themselves, and external actors (e.g. financial analysts) signal the extent to which they understand and agree with that depiction.

Markets can punish narratives that are confusing or inconsistent and, as a result, cause firms to lose value, particularly during periods of technological change. This happens because firms tend to be judged at the categorical level. When they branch out into other areas or industries, their original assessment criteria may not adapt to these changes adequately to reveal their true performance – which, in turn, lowers their evaluation.

Our research first set out to confirm that firms operating across different industries indeed face a valuation penalty. We developed the concept of linguistic alignment, which we define as the match between the language that organisations use to describe themselves and the expectations the wider environment imposes on them. This alignment depends on how well the firm’s self-description matches that of comparable organisations as seen through the eyes of financial analysts, whose comparisons and assessments ultimately shape the firm’s standing in the market.

We hypothesised that organisations with higher linguistic alignment would see stronger stock market performance. In the case of firms with a multi-industry presence, this could help offset the negative impact of diversification on its stock performance.

The role of linguistic alignment

Using 10-K filings from publicly listed firms in the United States between 1998 and 2021, we compiled a series of self-descriptions by firms. To capture external expectations, we drew on data from the Institutional Brokers’ Estimate System, which provides comprehensive future earnings forecasts and recommendations by financial analysts. We measured linguistic alignment by the co-occurrence of words or phrases in firms’ 10-K filings and the language used in financial analysts’ coverage of those same firms. We determined the extent to which firms spanned multiple industries by counting the unique words used in their 10-K narratives.

Our analysis shows that linguistic alignment has a positive effect on firms’ stock market performance. It also confirms that organisations are indeed punished for operating across multiple industries, but that greater linguistic alignment softens the impact of that penalty on share price. 

But linguistic alignment can shift for two distinct reasons – either because a firm changes how it describes itself or because its audience’s expectations change, or both. We tested which of these forces was driving the results we observed and found audience expectations to be the primary factor: Performance improves when financial analysts adjust their expectations to match a firm’s self-description, not when a firm tweaks its narrative to match expectations.

That doesn’t mean organisations have no influence over their linguistic alignment. They can shape it indirectly by crafting self-descriptions that influence and eventually shift what their audience expects, which then drives the performance rewards that come from linguistic alignment. For example, when financial analysts found Shell’s “energy transition” narrative confusing, the company switched to using more focused language emphasising the energy sources in which it has the most expertise. 

Of course, this process needs an incentive to work. If a closer match between external expectations and how a firm portrays itself benefits the firm, then executives shaping the organisation’s public image have good reason to move towards those expectations. Our findings confirm that this incentive exists: A firm's self-description leads to a convergence of external expectations towards the firm’s description, which, in turn, benefits the firm and further shapes it. The process is one of mutual adaptation, with the firm and its audience gradually converging on a shared account of what the firm is about.

Why storytelling matters

For much of the late 20th century, firm valuation in US markets followed a logic of categorical coherence. In other words, firms were expected to fit cleanly into established industry categories, and those that didn’t were often penalised through poorer valuation. Analysts and investors tend to favour such mental shortcuts, rewarding clarity and conformity over ambiguity or hybrid business models. Value, in other words, came from fitting neatly into a recognisable niche.

That structural logic has since given way to something more dynamic and centred on narratives. Today, many firms operate across far broader scopes than their formal classifications suggest, yet are still valued favourably, which suggests that structural conformity is no longer the only path to legitimacy. Indeed, some researchers have argued that investor behaviour is driven as much by compelling stories and shared narratives as by hard data.

In practical terms, our findings offer leaders a way to gauge whether the market understands and buys into their firm’s self-description, and how improving linguistic alignment can boost firm value. This matters most for organisations that operate across multiple categories. Although firms can be penalised for spanning multiple categories, they can soften this considerably through how they choose to tell their story.

Consider Apple. It operates across industries – from consumer electronics and computer software to digital entertainment and fintech. Despite this breadth, the public generally perceives the company’s story as coherent because of a common thread across most of its products: stylish, consumer-friendly, easy-to-use offerings built for everyday users. 

The key word here is “perceive”. Apple has woven a narrative that the market broadly accepts, and it is this acceptance that allows financial analysts to confidently recommend the stock to investors, which drives up its share price. So, whatever motivates CEOs to keep talking about their organisations, there’s a real payoff at stake. A firm’s stock market valuation isn't just a reflection of the value it creates. It’s also a reflection of the story it tells – and how well that story lands with the audience judging it.