Abstract

In choosing their business strategy, managers must account for the effect of their choice on the value of the real options associated with each strategy. When managers rely on stock market information to exercise or not these options, their value is higher when stock prices are more informative. We show theoretically that this induces conformity in strategic choices because the stock market is more informative about the value of common strategies. This conformity effect is stronger for private firms because investors have no incentive to produce information about their strategies. Consistent with this prediction, we show empirically that firms choose more differentiated products after going public and more so when their managers are better privately informed or when their peers'stock prices are less informative.