INVESTORS REACTIONS TO COMPETITIVE ACTIONS AMONG RIVALS: A STEP TOWARD STRATEGIC ASSET PRICING THEORY

This dissertation describes the development and empirical testing of strategic asset pricing theory (STRAPT). This explains the processes by which investors form ideas and judgments about a given firm‘s competitive strategy, and their ultimate belief about the impact these strategies will have on the firm‘s future stock price. My model explicitly accounts for information investors associate with dimensions of a firm‘s pattern of competitive actions, how investors process and interpret this information, and how they form opinions about the relationship between competitive strategy and future value of the firm‘s equity shares. Thus, by accounting for observed competitive behavior, my model stands in stark contrast to asset pricing theory – which asserts that financial markets are efficient and all investors rational – and instead sides with Hirshleifer (2001) who contends some investors form biases, and that the next stage of asset pricing theory is to look at how investors form opinions about stocks. Drawing from some unique theoretical areas: information perception/salience, information processing, social judgment, and decision making, my dissertation develops a conceptual model of this process by which long-buyers and short-sellers view and react to patterns of competitive actions carried out among rivals. My findings about how long-buyers regard between-firm ―differences‖ in the pattern of competitive actions the firm carries out over time, or strategic heterogeneity, are generally supportive of Miller and Chen (1996), who posited that distinctive processes such as heterogeneous strategies may decrease the ―legitimacy‖ of the firm. They exhibit a negative relationship with stock returns. Due to a different decision-making process, short-sellers come to different conclusions. Strategic heterogeneity exhibits a U-shaped relationship with short interest. My findings pertaining to how long-buyers value the number of strategic moves carried out by a firm generally support Young, Smith, and Grimm (1996) and Ferrier (2001). Specifically, I demonstrate that these investors value exposure to a firm, and this translates into positive stock market returns. Short-sellers, on the other hand, see the value of a large number of strategic actions only to an extent. Through their systematic analysis, they subscribe to the Porter (1980) and Shamsie (1990) viewpoint that more is not always better. This results in a U-shaped relationship with short interest