Going Public: How Stock Market Listing Changes Firm Innovation Behavior

Abstract

Although going public allows firms access to more financial capital that can fuel innovation, it also exposes them 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, causing such firms to increase their innovation levels but reduce 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; however, these innovations are less risky, characterized by fewer breakthrough innovations and fewer innovations in new-to-the-firm categories. The authors compare 40,000 product introductions in the period 1980–2011 from a sample of consumer packaged goods firms that went public with a benchmark sample of firms that remained private, and the results support their predictions. Utilizing tests to resolve questions about endogeneity, including self-selection, reverse causality, and competing explanations, the authors demonstrate that initial public offering selection and dynamics do not drive 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.

Does financial market growth improve income distribution? A comparison of developed and emerging market economies of the global sample

“…The former study reports that financial development indicator is not significant determinant of income inequality, irrespective of banking sector or stock market development indicator in Malaysia during 1980Malaysia during to 2000 In contrast, the latter study observes that increased banking credit tends to increase income inequalities but increased size and liquidity of the stock market have a negative impact on income inequality in a set of 49 countries over the period of 1994-2002. In finance, the stock market is the single most important market with respect to corporate investment decisions. Also, going public allows firms to access more financial capital that can fuel innovation (Wies & Moorman, 2015). The investment and innovation decisions of firms may have a considerable influence on unemployment, which may then affect the distribution of income.…”

“…Meanwhile, financial development can be a flexible tool to fight for even income distribution, because access to financial services is critical for individuals' productivity and welfare (Claessens & Perotti, 2007). Going public allows firms to access more financial capital that can fuel investment and innovation (Wies & Moorman, 2015) and then influence the unemployment and the distribution of income. Financial development has been historically captured by domestic credit provided by banking sector (i.e., banking development), although there is a consensus of the role of banking development as an engine of economic growth (Barajas, Chami, & Yousefi, 2013;Boukhatem, 2016;Ehrlich & Seidel, 2015;Gozgor, 2015;Hassan, Sanchez, & Yu, 2011;Odhiambo, 2009), and empirical studies document mixed findings of the effect of banking development on income inequality.…”

“…By controlling for country fixed effects, possible endogeneity problems, GDP per capita, and other control variables, they find that financial development increases income inequality. Also, going public allows firms to access more financial capital that can fuel innovation (Wies & Moorman, 2015). Utilizing 45 emerging countries from 1987 to 2011, the authors report that bank development increases income inequality (measured by Gini coefficient), but stock market development is not significantly related to income inequality, leading to insignificant contribution of overall financial development to income distribution.…”

“…Moreover, financial system has two main components: stock market and the banking system. Going public allows firms to access more financial capital that can fuel investment and innovation (Wies & Moorman, 2015) and then influence the unemployment and the distribution of income. A number of studies have explored the nexus between financial development and income inequality, but financial development in these studies is mostly captured by the banking development, whereas stock market development is usually ignored, though the growth of stock markets have been very impressive during the last few decades.…”

Innovation Culture, R&D Intensity, and Firm Innovation

“…It creates new products as well as new services that enable firms to obtain competitive advantages and achieve considerable market returns [1]. 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].…”