Managerial actions for responding to overvalued and undervalued stock in bull or bear markets

By accepting that investors' beliefs, behavior, and optimism and pessimism is reflected in stock prices, this study explores the actions that managers can take when faced with overvalued and undervalued market value. It begins by identifying investor perceptions of firm and market risk, and then draws on the underlying principles of costs and ease of reversibility of actions to construct a model for restoring balance between stock price and cash flow. The model thus incorporates the idea that actions can be aggressive, risk neutral, or defensive, and that the type of action taken should match the firm's initial value position (overvalued or undervalued), as well as the market cycle in which it operates (bull or bear market). This work extends current thinking on risk, particularly investor perceptions of nonsystematic risk as it relates to systematic risk. It clearly demonstrates that the effects of market cycles---bull and bear markets---cannot be ignored. It uses MANOVA multiple comparison testing to demonstrate that the ex ante impact of stock price and firm financial-performance on managerial action makes them more than dependent variables in the strategy equation.