55 Pages Posted: 2 Aug 2015 Last revised: 9 Jun 2017
Date Written: June 8, 2017
We show that product differentiation reduces the informativeness of a firm's stock price (or its peers' stock prices) about the value of its growth opportunities. This results in less efficient exercise of a firm's growth options when managers rely on information in stock prices for their decisions. This informational cost of differentiation induces conformity in product market strategies and is larger for private firms. Hence, a firm should differentiate more after going public. We confirm this prediction empirically and show that the post-IPO increase in differentiation is stronger for firms with better informed managers or less informative peers' stock prices.
Keywords: Conformism, Product Differentiation, Managerial Learning, Peers, Stock Price Informativeness
JEL Classification: G31, D21, D83
Suggested Citation: Suggested Citation
Foucault, Thierry and Frésard, Laurent, Corporate Strategy, Conformism, and the Stock Market (June 8, 2017). HEC Paris Research Paper No. FIN-2015-1099. Available at SSRN: https://ssrn.com/abstract=2638459 or http://dx.doi.org/10.2139/ssrn.2638459