Corporate Strategy, Conformism, and the Stock Market

55 Pages Posted: 2 Aug 2015 Last revised: 9 Jun 2017

Thierry Foucault

HEC Paris - Finance Department

Laurent Frésard

University of Maryland - Robert H. Smith School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 8, 2017

Abstract

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

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

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Laurent Frésard (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

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