Financial theory posits that capital markets convey through stock prices their expectation of the firm's future performance. We use concepts from Principal-Agent Theory and Prospect Theory to provide a theoretical explanation for the role stock price variation plays in managerial decision-making. We then empirically investigate what specific decisions managers undertake in response to stock price variation.We perform our empirical analyses in the context of the pharmaceutical industry. We find that drug firms whose stock under-performed the industry react differently than drug firms with high performing stocks.Specifically, laggards tend to implement more changes to their current product portfolio and distribution than high performing firms. And, the more laggards under-perform, the more they implement acquisitions aimed to produce immediate improvement in the firm's product portfolio. In contrast, drug firms whose stocks out-perform the industry tend to make fewer changes to their current portfolio and distribution.Instead, they focus more on long-term R&D and marketing of existing products. We interpret these findings in light of industry key success factors.Wyeth "has many issues to resolve before it can realize… bright future, Essner [Wyeth's Executive VP] admits. He lists the following: remaining an independent company, settling the diet-drug litigation, attracting good people, and maintaining stock performance at the top." (Pharmaceutical Executive 2000, p.68).

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W e evaluate whether stock prices can predict the sales takeoff and the long-term survival of firms at takeoff. We find that abnormal returns are strongly positive in the year prior to takeoff, thus suggesting an important signal of the takeoff. Moreover, we find that negative abnormal returns in the year of takeoff and one year after takeoff increase the hazard of market exit by 9.5 times relative to firms without these negative abnormal returns. We discuss the implications of these findings for managers and researchers.

Incubation is a process whereby the firm nurtures breakthrough discoveries and inventions to test their potential as new business platforms. The recent emergence of organizational roles associated with innovation incubation shows that internal incubation is becoming recognized as an important organizational capability. This development also suggests that firms that invest in discovery for competitive advantage recognize a need to leverage that investment more fully. While case studies describe incubation activities and note their importance, empirical research linking this capability to firm performance is limited. The current study represents an initial attempt at exploring the relationship empirically. Our main finding is that financial markets have difficulty valuing a firm's exploratory discovery investments and that the presence of an incubation capability positively moderates the impact of such investments on firm market valuation. The implication of this result is that investments in certain types of R&D may be suboptimized if there is not a parallel investment in a capability to incubate the opportunities that arise from potentially breakthrough inventions.