Corporate Strategy, Conformism, and the Stock Market
108 Pages Posted: 7 Aug 2018 Last revised: 13 Dec 2018
Date Written: March 28, 2018
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 fi rm should differentiate more after going public. We con firm this prediction empirically and show that the post-IPO increase in differentiation is stronger for fi rms with better informed managers or less informative peers' stock prices.
Keywords: Conformism, Product Differentiation, Managerial Learning, Peers, Informational efficiency
JEL Classification: G31, D21, D83
Suggested Citation: Suggested Citation