Academic journal article Journal of Managerial Issues

Clear Signals or Ambiguity? How Long-Buyers and Short-Sellers React Differently to Competitive Actions

Academic journal article Journal of Managerial Issues

Clear Signals or Ambiguity? How Long-Buyers and Short-Sellers React Differently to Competitive Actions

Article excerpt

In one of the earliest studies to explore the consequences of competitive interaction among rivals, Bettis and Weeks (1987) empirically demonstrated that not only do rival firms react to each other's competitive actions, but the stock market likewise reacts to the give and take of head-to-head competition. This seminal study laid the foundation for a research stream in strategic management known as competitive dynamics (Smith et al., 2001; Chen and Miller, 2015). Although there have been dozens of studies that have developed theory around and empirically tested the antecedents and consequences of competitive interaction, relatively few studies have explored how the stock market reacts to specific attributes associated with the firm's set of competitive actions (cf., Ferrier and Lee, 2002; Hughes-Morgan and Ferrier, 2014; Hughes-Morgan and Ferrier, 2016; Rindova et al., 2010). In an effort to better understand the complexities associated with stock market reactions to observed competitive strategy, the authors explore whether two fundamentally different categories of investors--long-buyers and short-sellers--react differently to various attributes associated with the firm's competitive behavior. Long-buyers are investors who purchase a stock with the expectation that its share price will rise. Short-sellers, on the other hand, borrow shares of a stock and sell them later on the open market with the expectation that the share price will decline. In many cases, both investor types have opposing beliefs about the future value of shares in the same company. Thus, consistent with views in behavioral finance, various classes of investors incorporate relevant or public information differently, leading to conflicting assessments of the value, and possibly even mispricing of a corporation's equity shares.

In general, that competitive behavior can be observed, interpreted, and utilized as informational cues that investors use when evaluating the firm's future value is posited. The findings from the Bettis and Weeks (1987) study provided an early glimpse into this phenomenon. Although both Kodak's and Polaroid's market value declined during the study's 1976-1977 time period, Kodak's losses were steeper than Polaroid's. Beyond examining each firm's fundamentals, it appears that most investors expected Kodak's actions it carried out to help the company fend off Polaroid's attacks on its market position. However, upon closer examination, Polaroid's attacks and Kodak's ineffective counter-attacks served to expose Kodak's competitive weaknesses. The investment community, interpreting and reacting to the Kodak-Polaroid battle as it unfolded, adjusted Kodak's future earnings estimates sharply downward.

Investor reactions to the Kodak-Polaroid battle demonstrates that some investors do indeed pay close attention to evaluative information beyond financial ratios. More specifically, owing to their unique perceptions and the use of systematic information processing approach, short-sellers are suggested to more likely than long-buyers to take specific attributes of a firm's competitive behavior into account when establishing estimates of future value. Indeed, notwithstanding the scope of prior competitive dynamics research, an intriguing, yet understudied aspect of how competitive actions influence performance involves the perceptions and impressions held by industry participants and observers. To date, only a few studies have explored, for example, the relationship between organizational actions and legitimacy (Pollock and Rindova, 2003), organizational actions and reputation (Rindova et al., 2007), organizational reputation and performance (Rindova et al., 2005), or how a rival's actions increase the level of competitive tension perceived by managers (Chen et al., 2007). The aim of this study is to contribute to this stream of research by exploring whether and how long-buyers and short-sellers--as investor-observers--perceive and react differently to informational cues embedded in the firm's pattern of competitive actions. …

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