Social Preference, Product Market Competition, and Firm Value
50 Pages Posted: 21 Feb 2013 Last revised: 25 Aug 2014
Date Written: August 24, 2014
This paper analyzes how customers’ social preference (SP) affects firm value and performance through product market competition. We construct a score measuring a firm’s effort of catering to customers’ social preference and find it is positively related to firm value in competitive industries but not in noncompetitive industries. This result is robust to a variety of model specifications and tests addressing simultaneity issues. We identify two channels for this effect to arise. First, higher SP scores lead to superior operating and competition performance in competitive industries. Second, higher SP scores lower financial distress risk in presence of competition pressures. The results suggest social investments can benefit financial performance if used as a product differentiation strategy.
Keywords: social preference, product market competition, firm performance
JEL Classification: G30, G31
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