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Corporate Strategy, Conformism, and the Stock Market

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  • Thierry Foucault

    (HEC Paris)

  • Laurent Frésard

    (University of Lugano; Swiss Finance Institute; University of Maryland - Robert H. Smith School of Business)

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 fi rm should differentiate more after going public. We con firm this prediction empirically and show that the post-IPO increase in differentiation is stronger for fi rms with better informed managers or less informative peers' stock prices.

Suggested Citation

  • Thierry Foucault & Laurent Frésard, 2018. "Corporate Strategy, Conformism, and the Stock Market," Swiss Finance Institute Research Paper Series 18-51, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1851
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    Cited by:

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    4. Liu, Frank Hong & Norden, Lars & Spargoli, Fabrizio, 2020. "Does uniqueness in banking matter?," Journal of Banking & Finance, Elsevier, vol. 120(C).
    5. Jaspersen, Stefan, 2021. "Mutual Fund Bets on Market Power," CFR Working Papers 16-07, University of Cologne, Centre for Financial Research (CFR), revised 2021.
    6. Ghulam Hussain Khan Zaigham & Xiangning Wang & Haji Suleman Ali, 2019. "Causal Relation Between Stock Market Performance and Firm Investment in China: Mediating Role of Information Asymmetry," SAGE Open, , vol. 9(4), pages 21582440198, October.
    7. Xiong, Yan & Yang, Liyan, 2021. "Disclosure, competition, and learning from asset prices," Journal of Economic Theory, Elsevier, vol. 197(C).
    8. 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.).
    9. 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.

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    More about this item

    Keywords

    Conformism; Product Differentiation; Managerial Learning; Peers; Informational efficiency;
    All these keywords.

    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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