Corporate Strategy, Conformism, and the Stock Market

We show that when corporate managers rely on the stock market as a source information, they are more likely to follow common strategies because this behavior enhances the informativeness of stock prices about their growth opportunities. Thus, the stock market induces conformity in strategic choices. Our theory predicts that this effect should be weaker for public firms. Consistent with this prediction, we observe empirically that firms differentiate their products more after going public. In line with our model, this pattern is stronger when managers are better informed or when the stock prices of a firm's peers are less informative.