Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox
Lubomir P. Litov
University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center
Todd R. Zenger
Washington University in Saint Louis - John M. Olin Business School
Patrick S. Moreton
Duke University - Fuqua School of Business
May 25, 2011
In this paper we argue that managers confront a paradox in selecting strategy. On the one hand, capital markets systematically discount uniqueness in the investment strategy choices of firms. Uniqueness in strategy heightens the cost of collecting and analyzing information to evaluate a firm’s future value. These greater costs in strategy evaluation discourage the collection and analysis of information regarding the firm, and result in a valuation discount. On the other hand, uniqueness in strategy is a necessary condition for creating economic rents and should, but for this information cost, be positively associated with firm value. We find empirical support for both propositions using a novel measure of investment strategy uniqueness in a firm panel dataset between 1985 and 2007.
Number of Pages in PDF File: 34
Keywords: corporate strategy, analyst coverage, diversification, internal capital markets
JEL Classification: G30working papers series
Date posted: March 16, 2011 ; Last revised: January 14, 2012
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