Abstract

http://ssrn.com/abstract=1787778
 
 

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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


Abstract:     
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: G30

working papers series


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Date posted: March 16, 2011 ; Last revised: January 14, 2012

Suggested Citation

Litov, Lubomir P. and Zenger, Todd R. and Moreton, Patrick S., Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox (May 25, 2011). Available at SSRN: http://ssrn.com/abstract=1787778 or http://dx.doi.org/10.2139/ssrn.1787778

Contact Information

Lubomir P. Litov (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-3794 (Phone)
University of Pennsylvania - Wharton Financial Institutions Center
2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Todd R. Zenger
Washington University in Saint Louis - John M. Olin Business School ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Patrick S. Moreton
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
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