Abstract
Every day, in thousands of companies around the world, in every industry, savvy managers inspire their workers to fight for market share. Every day, the business press makes heroes of firms that have successfully captured competitors’ market share, and recounts tales of woe of those vanquished. Do gains and losses in market share provide information that investors use in making their capital allocation decisions? This study investigates the effect on the market’s valuation of earnings when firms capture market share from, and lose market share to, their competitors. The Industrial Organization literature provides a link between market share change and expectations about future performance and growth opportunities. Accounting researchers long ago linked current earnings with expectations about future earnings and growth opportunities. This paper combines these two areas and investigates the role that changes in market share play in the market's valuation of earnings.
I specifically examine a firm's change in market share from the prior period, and the pattern of market share changes over a three-year period. I then analyze the relevance of current earnings, conditional on these market share measures, in both earnings prediction and market valuation contexts. I find the link between current performance and future performance is significantly enhanced in the presence of market share gains. Further, I find this relation holds for up to two years into the future after introducing other measures that represent the markets’ beliefs about future growth prospects. In addition, I find the market incrementally prices the earnings of firms that are increasing market share, and firms that exhibit momentum in market share growth, when the market perceives future growth opportunities to be greater relative to when growth opportunities are perceived to be fewer.
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