Friday, February 8, 2013

The Positive Impact of Innovation on Stock Market Value

The United States is now forced to compete on a global scale where new products and services will make a significant determination of long-term sustainable growth. Some business leaders have raised concerns that the United States is losing its competitive edge due to declining research and development investments when compared to other nations (Hall, 1993). Market leadership is seen as requiring higher levels of innovative engagement in order to continue to create strong international market presence.

Customers can raise the market value of an organization based upon a perception of organizations value. Innovative orientated firms are often seen as having superior quality products and this drives up demand for newer innovative products (John et. Al, 1999). The public good will from providing new customer solutions cannot be underestimated in the perception of customer value and is often rewarded with additional sales.

In addition, having an innovative reputation also improves innovation alliances with other organizations. Such reputation of organizations for regularly streams of new products and services increases the amount of cost saving alliances (Dollinger et al. 1997). It is through the sharing of knowledge and competencies that organizations can hedge their weaknesses and build upon their strengths through multi-firm collaboration.

Prior mistakes in evaluating the value of innovation have caused frequent undervaluation of financial benefits. Researchers have made computing errors by focusing on isolated events in an innovation project versus the entire project (Hall, 2009). Through evaluating the longitudinal and total benefit of an entire innovative project can leaders find higher levels of value to take on new projects.

Ashiah Sood from Emery University and Gerard Tellis from the University of Southern California studied the stock returns on innovative products and the creation of organizational wealth. The study helps highlight how evaluating the total innovative project shows higher levels of market returns 13 times that of individual innovative events. The study comes to a number of conclusions about innovative projects, innovation announcements, and total stock value returns.

The researchers looked at 5,481 announcements from 69 firms in five markets and 19 technologies between 1977 and 2006.  Each company was listed on the stock exchange and had significant available data. The purpose of the research was an attempt to determine if new innovations in technology were rewarded in stock price on the market (Sood & Tellis,2009). 

-Markets responded quickly and sufficiently to announcements about innovation through all stages of the project (initiation, development, and commercialization). When firms announced the new products, investments in those products, and expansion of facilities they made more than the costs associated with the innovations.

-Additional and multiple announcements on the same innovative finding didn’t necessarily impact the increase or decrease of market returns. Markets were considered efficient in terms of announcements and didn’t reward additional announcements on the same innovation.

-Innovation announcements should be accurate and appropriate. There was a positive market response from positive market announcements but a significantly negative reaction to over sensational or exaggerated announcements.

-Returns were highest for developmental projects versus start-up projects. The reason is most likely associated with the significant investments required for new projects.

-Small firms gained much more from innovation announcements due to their relative novelty in the market. Larger firms are much more researched and investors are often aware and less surprised by new announcements.

Dollinger, M., Golden, P. & Saxton, T.(1997). The effect of reputation on the decision to joint venture. Strategic Management J. 18(2) 127–140.

Hall, B. H. 2009. The financing of innovation. S. Shane, ed. The Blackwell Handbook of Technology and Innovation Management. Blackwell Publishers, Oxford, UK. Forthcoming.

Hall, B. (1993). The stock market’s valuation of R&D investment during the 1980’s. Amer. Econom. Rev. 83(2), 259–264.

John, G., Weiss, A. & Dutta. S. (1999). Marketing in technology intensive markets: Toward a conceptual framework. J. Marketing 63(Special Issue), 78–91.

Sood, A. & Tellis, G. (2009). Do Innovations Really Pay Off? Total Stock Market Returns to Innovation. Marketing Science, 28 (3).

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