Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox

34 Pages Posted: 16 Mar 2011 Last revised: 14 Jan 2012

Lubomir P. Litov

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

Todd Zenger

University of Utah

Patrick S. Moreton

Duke University - Fuqua School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: 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.

Keywords: corporate strategy, analyst coverage, diversification, internal capital markets

JEL Classification: G30

Suggested Citation

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

Lubomir P. Litov (Contact Author)

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

Todd R. Zenger

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)

Patrick S. Moreton

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

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