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Competitive strategy and stock market liquidity: a natural language processing approach

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Abstract

In this study, we examine how competitive strategy affects firm-level stock liquidity. Following Porter’s (1980) classification of generic strategies, we categorize firms into differentiators and cost leaders, where differentiators aim to differentiate themselves by delivering unique products and services while cost leaders attempt to achieve a low-cost position through efficient cost control. We hypothesize that firms emphasizing differentiation strategies show higher stock liquidity than those adopting cost leadership strategies because differentiators attract more investor attention and trading activities due to their larger growth potential. Employing a competitive strategy measure developed by a machine-learning-based natural language processing approach of Seed-Words plus Word2Vec Similarity Word Extension, we find results supporting our hypothesis among China’s A-share listed firms. Additional analyses suggest that differentiators may improve stock liquidity by enhancing earnings quality, increasing asset liquidity, and reducing information asymmetry. Overall, our study highlights the importance of strategic positioning in improving the stock market performance.

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Notes

  1. According to 9.1.4 of “the Stock Listing Rules of the Shanghai Stock Exchange (Revised in 2022)” and 9.1.2 of the “Stock Listing Rules of the Shenzhen Stock Exchange (Revised in 2022)”, when a listed firm’s stock is subject to a delisting risk warning, the word “*ST” shall be prefixed before the firm’s stock abbreviation; when a listed firm’s stock is subject to other risk warnings, the word “ST” shall be prefixed before the firm’s stock abbreviation; when a listed firm’s stock is subject to a delisting risk warning and other risk warnings at the same time, the word “*ST” shall be prefixed before the firm’s stock abbreviation.

  2. By sampling and comparing with the original financial reports, we find that the competitive strategy word set is highly consistent with the competitive strategy description in annual financial reports. The final competitive strategy word set is available at http://www.wingodata.cn/#/cn/pages/wenben?id=2&type=5&wenben=0.

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Acknowledgements

We acknowledge support from National Natural Science Foundation of China (72172038, 72241425), Sci Tech Innovation Foundation of School of Management, Fudan University, and Research Fund of Shanghai Data Exchange Corporation.

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  1. Fudan University, Shanghai, China

    Xintong Wang, Ruoqi Han & Min Zheng

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  1. Xintong Wang
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Table 9 Variable definitions
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Wang, X., Han, R. & Zheng, M. Competitive strategy and stock market liquidity: a natural language processing approach. Inf Technol Manag 25, 99–112 (2024). https://doi.org/10.1007/s10799-023-00401-2

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