Abstract
In the previous chapters where we have examined the valuation role of accounting data, we have treated firms as if they were operating in isolation, with no attention being paid to possible interactions between them. In the real world, different firms are bound together through explicit or implicit relations, and they must interact with one another in various markets. In this chapter, we extend the previous analyses by considering a particular type of interfirm interaction, one that takes place in the product market. When firms compete in a common market, their operational decisions are intertwined because actions taken by one firm have consequences for others, and vice versa. Within such a context, we examine how a firm’s profitability relative to that of its industry peers affects its economic decisions and hence its value.
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Notes
- 1.
As shown in Hao et al. (2011b), the qualitative predictions are the same if firms engage in Bertrand-type competition with differentiated products.
- 2.
As our focus here is on how industry-wide common shocks impact different firms, we ignore, for simplicity, firm-level real options. Nonetheless, when we test the predicted role of relative profitability later, we will control for those variables affecting returns that arise from real options.
- 3.
The problem in this case is different from that characterized under either Cournot or Bertrand competition. Here, differences in quantities exist for exogenous reasons, such as firms having built up different customer bases from previous operations.
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Zhang, G. (2014). Interpreting Financial Information in an Industry Context. In: Accounting Information and Equity Valuation. Springer Series in Accounting Scholarship, vol 6. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-8160-7_12
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DOI: https://doi.org/10.1007/978-1-4614-8160-7_12
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