Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox

45 Pages Posted: 20 Mar 2009 Last revised: 29 May 2013

See all articles by Lubomir P. Litov

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Patrick S. Moreton

Duke University - Fuqua School of Business

Todd Zenger

University of Utah

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 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.

Keywords: analyst coverage, corporate strategy, asymmetric information, investment policy

JEL Classification: G30, G14

Suggested Citation

Litov, Lubomir P. and Moreton, Patrick S. and Zenger, Todd R., Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1364037 or http://dx.doi.org/10.2139/ssrn.1364037

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Patrick S. Moreton

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Todd R. Zenger (Contact Author)

University of Utah ( email )

David Eccles School of Business
1655 East Campus Center Drive
Salt Lake City, UT 84112
United States
801 585-3981 (Phone)
801 581-7939 (Fax)

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