Strategy Behaviors of Firms in Times of External Shocks and Their Impact on Operating Performance – An Event Study

This study investigates whether changes in strategic behaviors of firms in times of external shocks such as economic recessions impact performance of firms in subsequent time periods. We define 2007-2008 as a great recession period and identify the directional changes in strategy variables of firms between 2001-2006 (6-years) and a great recession (2007-2008). Then we investigate whether the directional changes in strategy variables affect firm performance in the subsequent years (2009 and 2010). The results show that indeed the set of important strategy variables are different between positive and negative ROE/ROI firms and their impact on firm performance: Increase in advertising is improving firm performance. However, while external financing in debt and equity (ΔSEQ and ΔLev) can be helpful for firms with negative ROE/ROI, they are detrimental to firms with positive ROE/ROI. Also shown is that a tighter working capital management (ΔRecPay2Y) and less capital investment (ΔI2Y) help positive ROE/ROI firms’ performance but they are harmful to negative ROE/ROI firms’ performance. Lastly, increase in R&D is helpful to positive ROE/ROI firms’ performance while it is harmful to negative ROE/ROI firms’ performance