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Corporate Strategy, Conformism, and the Stock Market

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  • Thierry Foucault
  • Laurent Fresard

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.Received January 19, 2016; editorial decision May 8, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Thierry Foucault & Laurent Fresard, 2019. "Corporate Strategy, Conformism, and the Stock Market," The Review of Financial Studies, Society for Financial Studies, vol. 32(3), pages 905-950.
    • Handle: RePEc:oup:rfinst:v:32:y:2019:i:3:p:905-950.
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    More about this item

    JEL classification:

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

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