Faculty of Economics and Business Administration Publications Database

Going Public: How Stock Market Listing Changes Firm Innovation Behavior

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Authors:
Moorman, Christine
Source:
ISSN-Print: 0022-2437
Link External Source: Online Version
Year: 2015
Keywords: Innovation; Breakthrough innovation; Stock market impact; IPO; Marketing-finance interface; Consumer packaged goods
Abstract:

While going public allows firms access to more financial capital that can fuel innovation, it also exposes firms to a set of myopic incentives and disclosure requirements that constrain innovation. This tension is expected to produce a unique pattern of innovation strategies among firms going public with firms increasing their innovation levels but reducing their innovation riskiness. Specifically, the authors predict that after going public, firms innovate at higher levels and introduce higher levels of variety with each innovation while also introducing less risky innovation, characterized by fewer breakthrough innovations and fewer innovations into new-to-the-firm categories. Examining 40,000 product introductions from 1980–2011 in a sample of consumer packaged goods' firms that go public compared to a benchmark sample of firms that remain private, results support these predictions. Utilizing tests to resolve questions about endogeneity, including self-selection, reverse causality, and competing explanations, the authors demonstrate that IPO selection and IPO dynamics are not driving this going-public effect. The authors also uncover a set of industry factors that mitigate the drop in breakthrough innovation by offering product-market incentives that counterbalance the documented effect of stock market incentives.

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