DP11073 Corporate Strategy, Conformism, and the Stock Market

Author(s):	Thierry Foucault, Laurent Frésard
Publication Date:	January 2016
Keyword(s):	Managerial Learning, Peers, Product Differentiation, Stock price Informativeness
JEL(s):	D21, D83, G31
Programme Areas:	Financial Economics, Industrial Organization
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=11073

We show that managers can raise firm value by imitating other public firms' strategies because imitation enhances their ability to obtain information from their own stock price or their peers' stock prices, which improves the efficiency of their investment decisions. This conformity effect is stronger for private firms' managers because they can learn information from stock prices only if they imitate public firms' strategies. In line with this prediction, we observe empirically that firms differentiate more after going public and that this pattern is stronger for firms with better informed managers or whose peers have less informative stock prices.