IDEAS home Printed from https://ideas.repec.org/a/inm/ororsc/v16y2005i6p637-660.html
   My bibliography  Save this article

When the Market Misleads: Stock Prices, Firm Behavior, and Industry Evolution

Author

Listed:
  • Carl Joachim Kock

    (Instituto de Empresa, Maria de Molina 11, 13, 15, 28006 Madrid, Spain)

Abstract

This paper augments learning and institutional theories of firm behavior with an explicit focus on the idiosyncratic characteristics of learning from financial markets. Various streams of literature implicitly assume that financial markets influence firm strategies, yet the specifics of these interactions are not well specified. Motivated by a case study of the retail brokerage industry, this study proposes three particular characteristics of learning from financial markets. First, there is vicarious learning from outcomes (e.g., stock valuations), yet this has characteristics that are more similar to institutional forms of mimetic isomorphism. Second, the forward-looking and complex nature of financial valuations incites a paradoxically simplified type of crude heuristic learning. Third, there is a mutual and simultaneous learning process in that firms learn from financial markets, which in turn are themselves in a process of social construction. This combination of special characteristics suggests a number of learning pathologies that center around an increasing likelihood (compared with other types of learning and adaptation) of falling prey to misleading signals. A computer simulation, based on a model in which Cournot duopolists play a multistage game involving investment and cost reduction, explores the implications of these characteristics and pathologies in a systematic way.

Suggested Citation

  • Carl Joachim Kock, 2005. "When the Market Misleads: Stock Prices, Firm Behavior, and Industry Evolution," Organization Science, INFORMS, vol. 16(6), pages 637-660, December.
  • Handle: RePEc:inm:ororsc:v:16:y:2005:i:6:p:637-660
    DOI: 10.1287/orsc.1050.0141
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/orsc.1050.0141
    Download Restriction: no

    File URL: https://libkey.io/10.1287/orsc.1050.0141?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Lisa Meulbroek, 2001. "The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options," Financial Management, Financial Management Association, vol. 30(2), Summer.
    2. Kraus, Alan & Smith, Maxwell, 1998. "Endogenous sunspots, pseudo-bubbles, and beliefs about beliefs," Journal of Financial Markets, Elsevier, vol. 1(2), pages 151-174, August.
    3. Einhorn, Hj & Hogarth, Rm, 1981. "Behavioral Decision-Theory - Processes Of Judgment And Choice," Journal of Accounting Research, Wiley Blackwell, vol. 19(1), pages 1-31.
    4. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. "Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
    5. Arie Y. Lewin & Henk W. Volberda, 1999. "Prolegomena on Coevolution: A Framework for Research on Strategy and New Organizational Forms," Organization Science, INFORMS, vol. 10(5), pages 519-534, October.
    6. Paul Krugman, 1991. "History versus Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 651-667.
    7. Cherian Samuel, 2001. "Stock market and investment: the signalling role of the market," Applied Economics, Taylor & Francis Journals, vol. 33(10), pages 1243-1252.
    8. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 69(1), pages 99-118.
    9. Konar, Shameek & Cohen, Mark A., 1997. "Information As Regulation: The Effect of Community Right to Know Laws on Toxic Emissions," Journal of Environmental Economics and Management, Elsevier, vol. 32(1), pages 109-124, January.
    10. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
    11. Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(4), pages 541-559.
    12. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    13. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 115-136.
    14. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    15. Malerba, Franco, et al, 1999. "'History-Friendly' Models of Industry Evolution: The Computer Industry," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 8(1), pages 3-40, March.
    16. James G. March, 1991. "Exploration and Exploitation in Organizational Learning," Organization Science, INFORMS, vol. 2(1), pages 71-87, February.
    17. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(2), pages 157-216.
    18. John G. Matsusaka, 1993. "Takeover Motives during the Conglomerate Merger Wave," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 357-379, Autumn.
    19. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    20. Barro, Robert J, 1990. "The Stock Market and Investment," The Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 115-131.
    21. Topol, Richard, 1991. "Bubbles and Volatility of Stock Prices: Effect of Mimetic Contagion," Economic Journal, Royal Economic Society, vol. 101(407), pages 786-800, July.
    22. Daniel A. Levinthal & James G. March, 1993. "The myopia of learning," Strategic Management Journal, Wiley Blackwell, vol. 14(S2), pages 95-112, December.
    23. Henrich R. Greve, 2002. "Sticky Aspirations: Organizational Time Perspective and Competitiveness," Organization Science, INFORMS, vol. 13(1), pages 1-17, February.
    24. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
    25. David J. Teece & Gary Pisano & Amy Shuen, 1997. "Dynamic capabilities and strategic management," Strategic Management Journal, Wiley Blackwell, vol. 18(7), pages 509-533, August.
    26. Pertti H. Lounamaa & James G. March, 1987. "Adaptive Coordination of a Learning Team," Management Science, INFORMS, vol. 33(1), pages 107-123, January.
    27. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. "The Stock Market Investments: Is the Market a Sideshow?," Scholarly Articles 30747157, Harvard University Department of Economics.
    28. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-896, July.
    29. Dittmar, Amy K, 2000. "Why Do Firms Repurchase Stock?," The Journal of Business, University of Chicago Press, vol. 73(3), pages 331-355, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Hu Tian & Xiaolong Zheng & Kang Zhao & Maggie Wenjing Liu & Daniel Dajun Zeng, 2022. "Inductive Representation Learning on Dynamic Stock Co-Movement Graphs for Stock Predictions," INFORMS Journal on Computing, INFORMS, vol. 34(4), pages 1940-1957, July.
    2. Godart, Frédéric & Pistilli, Luca, 2024. "The multifaceted concept of disruption: A typology," Journal of Business Research, Elsevier, vol. 170(C).
    3. Jen-Jen Tseng & Ping-Hung Chou, 2009. "Mimetic isomorphism and its effect on merger and acquisition activities in Taiwanese financial industries," The Service Industries Journal, Taylor & Francis Journals, vol. 31(9), pages 1451-1469, November.
    4. Houdou Basse Mama, 2017. "The interaction between stock prices and corporate investment: is Europe different?," Review of Managerial Science, Springer, vol. 11(2), pages 315-351, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    2. Giovanni Gavetti & Daniel Levinthal & William Ocasio, 2007. "Perspective---Neo-Carnegie: The Carnegie School’s Past, Present, and Reconstructing for the Future," Organization Science, INFORMS, vol. 18(3), pages 523-536, June.
    3. Chen, Naiwei & Yu, Min-Teh, 2024. "Less is more: Evidence from firms with low cash and debt," Research in International Business and Finance, Elsevier, vol. 69(C).
    4. Ndikumana, Leonce, 2005. "Financial development, financial structure, and domestic investment: International evidence," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 651-673, June.
    5. Henrich R. Greve, 2002. "Sticky Aspirations: Organizational Time Perspective and Competitiveness," Organization Science, INFORMS, vol. 13(1), pages 1-17, February.
    6. Justin Tan & Yong Zeng, 2009. "A stage-dependent model of resource utilization, strategic flexibility, and implications for performance over time: Empirical evidence from a transitional environment," Asia Pacific Journal of Management, Springer, vol. 26(3), pages 563-588, September.
    7. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    8. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    9. Pereira da Silva, Paulo, 2021. "Do managers pay attention to the market? A review of the relationship between stock price informativeness and investment," Journal of Multinational Financial Management, Elsevier, vol. 59(C).
    10. Elizabeth G. Pontikes & William P. Barnett, 2017. "The Coevolution of Organizational Knowledge and Market Technology," Strategy Science, INFORMS, vol. 2(1), pages 64-82, March.
    11. Johann Burgstaller, 2002. "Are stock returns a leading indicator for real macroeconomic developments?," Economics working papers 2002-07, Department of Economics, Johannes Kepler University Linz, Austria.
    12. Mary J. Benner, 2010. "Securities Analysts and Incumbent Response to Radical Technological Change: Evidence from Digital Photography and Internet Telephony," Organization Science, INFORMS, vol. 21(1), pages 42-62, February.
    13. F Alexandre & P Bacao, 2006. "Investment and Non-fundamental Movements in Asset Prices: is there a role for monetary policy?," Economic Issues Journal Articles, Economic Issues, vol. 11(1), pages 65-95, March.
    14. Pedota, Mattia & Cicala, Francesco & Basti, Alessio, 2024. "A Wild Mind with a Disciplined Eye: Unleashing Human-GenAI Creativity Through Simulated Entity Elicitation," OSF Preprints 3bn95, Center for Open Science.
    15. Fujun Lai & Qian Wang & Qingxiang Feng, 2019. "Does Chinese Financial Market Information Promote Listed Manufacturing Firms’ Productivity?," Sustainability, MDPI, vol. 11(2), pages 1-20, January.
    16. Sapienza, Paola & Polk, Christopher, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers 3826, C.E.P.R. Discussion Papers.
    17. Mehmet Ali Köseoglu & John A. Parnell & Melissa Yan Yee Yick, 2021. "Identifying influential studies and maturity level in intellectual structure of fields: evidence from strategic management," Scientometrics, Springer;Akadémiai Kiadó, vol. 126(2), pages 1271-1309, February.
    18. Christina Fang & Daniel Levinthal, 2009. "Near-Term Liability of Exploitation: Exploration and Exploitation in Multistage Problems," Organization Science, INFORMS, vol. 20(3), pages 538-551, June.
    19. Gedajlovic, Eric & Cao, Qing & Zhang, Hongping, 2012. "Corporate shareholdings and organizational ambidexterity in high-tech SMEs: Evidence from a transitional economy," Journal of Business Venturing, Elsevier, vol. 27(6), pages 652-665.
    20. Luciana D’Adderio, 2014. "The Replication Dilemma Unravelled: How Organizations Enact Multiple Goals in Routine Transfer," Organization Science, INFORMS, vol. 25(5), pages 1325-1350, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ororsc:v:16:y:2005:i:6:p:637-660. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.