Firm Innovation and the Ratchet Effect Among Consumer Packaged Goods Firms

Abstract

W e consider how public firms influence their stock market valuations by timing the introduction of innovative new products. Our focus is on innovation ratchet strategy-firms timing the introduction of innovations in order to demonstrate an improvement in the number of introductions over time. We document that public firms use an innovation ratchet strategy more often than do private firms and that the stock market rewards public firms for doing so. These rewards from the stock market, however, come at the expense of performance in product markets. Specifically, because firms using an innovation ratchet strategy delay some product introductions, they have significantly lower sales growth in the year they ratchet. Finally, we identify firm and market characteristics that influence the likelihood that a public firm will engage in an innovation ratchet strategy.

USING CATEGORICAL DEA TO ASSESS THE EFFECT OF SUBSIDY POLICIES AND TECHNOLOGICAL LEARNING ON R&D EFFICIENCY OF IT INDUSTRY

“…IDEX ASA located in Norway is found to have a higher patent intensity and R&D intensity, which is affected by the lower revenue. This might be because a firm with a high patent intensity often delays introductions and thus reduces potential revenue (Moorman, Wies, Mizik, & Spencer, 2012). In these two variables, these countries are not similarly characterized with respect to their R&D subsidy intensity (z h ) level.…”

Innovation Culture, R&D Intensity, and Firm Innovation

“…Particularly for public firms, top managers face widespread pressure from numerous stakeholders, and managers are expected to focus on investment that may create considerable short-term performance that would induce shareholders or potential investors to obtain substantial stock market returns [4,5]. Thus, with the increase of R&D intensity, the symbiotic tangible rewards, threats, deadlines, and competitive pressure diminish the intrinsic motivation of employees [60].…”

“…Given the significance of innovation, firms expect to understand the elements that determine incentives to innovate, especially for public firms because of their more complex internal and external environment [2,3]. Compared with a private firm, "myopic stock market incentives" propel managers to cut R&D expenditures and prefer projects with short-term and less risky returns that are favored easily by shareholders and potential investors [4,5]. Thus, when improvements in R&D expenditure encounter various restrictions, public firms transfer the perspective from tangible to intangible focus and discover that innovation culture may be a new avenue for improving innovation output [6].…”

New and Improved?

“…Oligopolists may engage in "planned obsolescence" whereby they produce goods with uneconomically short useful lives, forcing customers to make otherwise unnecessary repeat purchases (Bulow, 1986). And Moorman et al (2012) found evidence some firms withhold innovative new products from the market for strategic reasons.…”