Corporate Strategy and Analyst Incentives: Do Capital Markets Encourage or Discourage Uniqueness?

May 4, 2004 … evidence that at least in line with our hypothesis that financial markets actually restrict business strategy manager ….

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First, firms with unusual strategies generally receive less analyst coverage than those with more familiar strategies. Holding all other variables constant, an increase in coverage by one analyst, the equivalent of increasing its share of the analysts from a mean of 10% to 12%, increases the firm’s Tobin’s q by approximately .07. For a firm with $100 million in assets at book value, the increased coverage would add $7 million to its market value, suggesting that the returns to courting analysts are quite high.
Returning to our original question of whether managers choose strategies with an eye towards the reactions of the analyst community, our results indicate that they do. Recall that in our simple specification of the firm’s behavior, we hypothesized that managers consider two effects on the market value, V, of their firms when choosing how unique to make their strategy: the effect of uniqueness on overall firm performance, P(d) and the effect of uniqueness on the level of coverage they obtain, C(d).
Our results thus confirm that managers face a clear paradox in choosing strategy. While uniqueness is a necessary condition for value creation, as measured by expected future operating performance, uniqueness in strategy also mandates more costly expenditures to evaluate strategy

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2 Responses to “Corporate Strategy and Analyst Incentives: Do Capital Markets Encourage or Discourage Uniqueness?”

  1. Fletcher Boning on August 9th, 2012 at 10:41 am

    At the moment it seems like Drupal is the most effective blogging platform available right now. (from what I’ve read) Is that what you are using on your blog?

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