Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox
34 Pages Posted: 16 Mar 2011 Last revised: 14 Jan 2012
Date Written: 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.
Keywords: corporate strategy, analyst coverage, diversification, internal capital markets
JEL Classification: G30
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