Corporate Strategy, Analyst Coverage, and the Uniqueness Paradox

In this paper we argue that managers confront a paradox in selecting strategy. On the one hand, capital markets systematically discount uniqueness in the investment strategy choices of firms. Uniqueness in strategy heightens the cost of collecting and analyzing information to evaluate a firm’s future value. These greater costs in strategy evaluation discourage the collection and analysis of information regarding the firm, and result in a valuation discount. On the other hand, uniqueness in strategy is a necessary condition for creating economic rents and should, but for this information cost, be positively associated with firm value. We find empirical support for both propositions using a firm panel dataset between 1985 and 2007. 1 We thank Garrick Blalock, Richard Frankel, Dirk Hackbarth, Bart Hamilton, Rob Solomon, Bernard Yeung and seminar participants at University of Pennsylvania, INSEAD, London Business School, NYU, USC, Washington University in St. Louis, and Cornell University for helpful comments and suggestions in preparing this manuscript.