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Corporate Strategy, Conformism, and the Stock Market

Author

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  • Thierry Foucault

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Laurent Frrsard

Abstract

We show that product differentiation reduces the informativeness of a firm's stock price (or its peers' stock prices) about the value of its growth opportunities. This results in less efficient exercise of a firm's growth options when managers rely on information in stock prices for their decisions. This informational cost of differentiation induces conformity in product market strategies and is larger for private firms. Hence, a firm should differentiate more after going public. We confirm this prediction empirically and show that the post-IPO increase in differentiation is stronger for firms with better informed managers or less informative peers' stock prices.

Suggested Citation

  • Thierry Foucault & Laurent Frrsard, 2015. "Corporate Strategy, Conformism, and the Stock Market," Working Papers hal-02002755, HAL.
    • Handle: RePEc:hal:wpaper:hal-02002755
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    Cited by:

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    3. Xiong, Yan & Yang, Liyan, 2021. "Disclosure, competition, and learning from asset prices," Journal of Economic Theory, Elsevier, vol. 197(C).
    4. Caio Machado & Ana Elisa Pereira, 2020. "Competing for Stock Market Feedback," Documentos de Trabajo 545, Instituto de Economia. Pontificia Universidad Católica de Chile..
    5. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    6. Paul Borochin & Jie Yang, 2016. "Options, Equity Risks, and the Value of Capital Structure Adjustments," Finance and Economics Discussion Series 2016-097, Board of Governors of the Federal Reserve System (U.S.).
    7. Caio Machado & Ana Elisa Pereira, 2023. "Optimal Capital Structure with Stock Market Feedback," Review of Finance, European Finance Association, vol. 27(4), pages 1329-1371.
    8. Liu, Frank Hong & Norden, Lars & Spargoli, Fabrizio, 2020. "Does uniqueness in banking matter?," Journal of Banking & Finance, Elsevier, vol. 120(C).
    9. Jaspersen, Stefan, 2021. "Mutual Fund Bets on Market Power," CFR Working Papers 16-07, University of Cologne, Centre for Financial Research (CFR), revised 2021.

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    More about this item

    Keywords

    Conformism; Product Differentiation; Managerial Learning; Peers; Stock Price Informativeness;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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