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

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.