Working Paper: CEPR ID: DP11073
Authors: Thierry Foucault; Laurent Frsard
Abstract: 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.
Keywords: managerial learning; peers; product differentiation; stock price informativeness
JEL Codes: D21; D83; G31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Imitation of public firms' strategies (L21) | Enhancement of the value of private firms (G32) |
| Enhancement of the value of private firms (G32) | Increased informativeness of their stock prices (G14) |
| Increased informativeness of their stock prices (G14) | Better investment decisions (G11) |
| Higher informational costs (D89) | Greater conformity effect (C92) |
| Managerial information (M15) | Influence on firms' strategic choices (L21) |
| Stock price informativeness (G14) | Influence on firms' strategic choices (L21) |
| Going public (G24) | Increased product differentiation (L15) |
| Better-informed managers (D80) | Increased product differentiation post-IPO (L15) |
| Less informative peer stock prices (G19) | Increased product differentiation post-IPO (L15) |