Tuesday, July 05, 2016

How the capital market affects firm strategy

“My research currently looks at the interaction between the capital market and firm strategy in terms of how capital markets influence the strategic decisions made by companies and their managers, and how it shapes the way they compete with other firms. My interest in this topic goes back to my college life. When I began college I chose finance as my major. It was a very hot major back then. I learned a lot about the newly-developed stock market in China. But later I realised that in order for the capital market to develop well, you really need to have good quality companies. And so when I went to graduate school for my PhD, I chose strategy as my major because I really want to help companies grow better.

At INSEAD I often took advantage of the free subscriptions to The Wall Street Journal and the Financial Times so that I could become well-versed in the language of business. It struck me that almost every day there was a front-page story about some big name company missing its earnings forecast and the resulting drop in its stock prices. So this led to my dissertation in which I looked at the pressure managers face to meet or beat analyst forecasts on firm earnings, and how this pressure influences companies’ strategic decisions. I published a paper on that and that’s how I got into this area of academic research. Over the last decade my co-authors and I have found that in almost all industries – whether it’s in the US or in China, developed or developing countries – the pressure to meet or beat analysts’ forecasts or earnings pressure is causing managers to engage in more short-term-oriented behaviour. That creates problems for firms to really perform well in the long-term. If you want firms to excel in the long-term, they really need to make a commitment and pursue strategic investments that might sacrifice short-term performance. But if they face pressure to deliver short-term performance in the current quarter, or current year, that’s going to be a problem for them.” ~ Yu Zhang, CEIBS Prof. of Management