Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Do Innovations Ever Pay Off? the Value to Investing in Innovation

23.06.2008
Gerard J. Tellis, a professor of marketing at the University of Southern California’s Marshall School of Business, and Ashish Sood, an assistant professor at the of marketing at Emory University’s Goizueta Business School have devised a new metric for evaluating the total stock market returns to an innovation project.

Management has often been criticized for an earnings-focused short term orientation that reduces or delays investments in risky, long term innovation projects in order to boost the firm’s stock price. Rarely does a discussion of corporate strategy or entrepreneurial motivation proceed these days without alluding to one significant dynamic—innovation.

For example, Clayton Christensen and Scott Anthony write in Business Week, ”The notion that managers must above all appease investors drives behavior that focuses exclusively on quarterly results. Thus, many management teams hesitate to invest in promising innovations that are likely to hurt near-term financial performance.” But do investments in innovations hurt stock prices?

Not so suggests Gerard J. Tellis, a professor of marketing at the University of Southern California’s Marshall School of Business, and Ashish Sood, an assistant professor at the of marketing at Emory University’s Goizueta Business School. They have devised a new metric for evaluating the total stock market returns to an innovation project. “We’re assessing whether markets respond negatively to investments in innovation and whether they enforce a shorter orientation,” explains Tellis.

“The key questions are: how does the stock market react to announcements about innovation and what is the total return to the innovation project?” They answer these questions in their paper, “Do Innovations Really Payoff? Total Returns to Innovation,” which is forthcoming in Marketing Science, the top journal in the marketing field.

Tellis and Sood, who have teamed up before to research areas such as technological evolution and new products adoption across global markets, set out again with this research to help managers better understand and quantify the investments they are making in innovation. In this case, they want them to recognize the power of innovation to do everything from fueling the growth of new products to promoting the global competitiveness of nations. “Firms may underinvest in innovation because of the high costs, the long delay in reaping market returns if any, the uncertainty of those returns, and the difficulty of adequately measuring them,” suggests Tellis. “Indeed, accurately assessing the market returns to innovation may be critical to motivating firms to invest in innovation.”

The authors argue that the best approach is for firms to examine the market returns to an entire innovation project. They demonstrate this by using the so-called event study method, also known as the Fama-French-Momentum 4 Factor Model, to analyze 5,481 announcements—everything from the start of a project to joint ventures and key approvals—from 69 firms in five markets and 19 technologies during the period from 1977 to 2006. The event study method, popular for the last 30 years, captures the stock market’s reaction to an announcement and actually predicts the valuation that the stock market puts on that particular announcement.

The authors analyze all announcements related to a project and the returns to each announcement. This all-inclusive approach sets their research apart from existing studies. “A big limitation of prior research is that they were looking at one event,” notes Sood. ” It’s necessary to look at the entire project and all the announcements that the firm makes. That gives us a better estimate of the returns to the investments.” As a means of organizing the announcements, Sood and Tellis separate them into three groups: the activities related to the setup of the innovation project; the activities related to the development of the product; and the market activities related to the commercialization of the product.

The authors find that total market returns to an innovation project are $643 million, more than 13 times the $49 million due to an average innovation event.

Returns to overall projects are substantially more than returns to individual events. “Focus on only one or two types of events or announcements will lead to underestimation of total returns,” notes Sood. “Any conclusion based on that lower, wrong estimate might actually make the manager decide that innovation is no good or the markets are not receptive.”

The research also reveals that, of the three sets of innovation activities, returns to the development activities are consistently the highest across and within categories. “The big surprise was that the markets actually react more to the development phase than the commercialization phase, which shows that the stock market is not so short-term in its outlook,” says Sood. “Because the stock markets reward firms for making announcements in the development phase, it is in the firms’ interest to be open to the market and to update progress on an innovation project.”

It’s important to note, adds Tellis, that quality, not quantity, defines market reactions to announcements. A firm that decides to simply increase the number of project-related announcements it makes to inspire market reaction will not necessarily yield a greater return on investment. Says Tellis: “A mere increase in the number of announcements will not improve your returns.”

Sood and Tellis already have continued down their path of innovation research. They are using existing data to develop a statistical model that will help firms look at the returns in the initial phases of an innovation project and predict how the stock market will react in future phases. After all, the market returns to innovation are among the best assessments of the true rewards of innovation.

About the USC Marshall School of Business
Based at the crossroads of the Pacific Rim, in Los Angeles at the University of Southern California, the USC Marshall School of Business is dedicated to training global leaders to make a difference. USC Marshall is the best place to learn the art and science of business.

The school’s complete array of programs annually serve more than 5,000 undergraduate, graduate, professional and executive-education students, who attend classes at the main University Park campus in Los Angeles, and in satellite facilities in Irvine and North San Diego County.

In conjunction with Jiao Tong University in Shanghai, USC Marshall also operates a Global Executive MBA program in China.

LeRoy Hudson | newswise
Further information:
http://www.marshall.usc.edu

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Quantum optical sensor for the first time tested in space – with a laser system from Berlin

For the first time ever, a cloud of ultra-cold atoms has been successfully created in space on board of a sounding rocket. The MAIUS mission demonstrates that quantum optical sensors can be operated even in harsh environments like space – a prerequi-site for finding answers to the most challenging questions of fundamental physics and an important innovation driver for everyday applications.

According to Albert Einstein's Equivalence Principle, all bodies are accelerated at the same rate by the Earth's gravity, regardless of their properties. This...

Im Focus: Traffic jam in empty space

New success for Konstanz physicists in studying the quantum vacuum

An important step towards a completely new experimental access to quantum physics has been made at University of Konstanz. The team of scientists headed by...

Im Focus: How gut bacteria can make us ill

HZI researchers decipher infection mechanisms of Yersinia and immune responses of the host

Yersiniae cause severe intestinal infections. Studies using Yersinia pseudotuberculosis as a model organism aim to elucidate the infection mechanisms of these...

Im Focus: Interfacial Superconductivity: Magnetic and superconducting order revealed simultaneously

Researchers from the University of Hamburg in Germany, in collaboration with colleagues from the University of Aarhus in Denmark, have synthesized a new superconducting material by growing a few layers of an antiferromagnetic transition-metal chalcogenide on a bismuth-based topological insulator, both being non-superconducting materials.

While superconductivity and magnetism are generally believed to be mutually exclusive, surprisingly, in this new material, superconducting correlations...

Im Focus: Studying fundamental particles in materials

Laser-driving of semimetals allows creating novel quasiparticle states within condensed matter systems and switching between different states on ultrafast time scales

Studying properties of fundamental particles in condensed matter systems is a promising approach to quantum field theory. Quasiparticles offer the opportunity...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Sustainable Water use in Agriculture in Eastern Europe and Central Asia

19.01.2017 | Event News

12V, 48V, high-voltage – trends in E/E automotive architecture

10.01.2017 | Event News

2nd Conference on Non-Textual Information on 10 and 11 May 2017 in Hannover

09.01.2017 | Event News

 
Latest News

Arctic melt ponds form when meltwater clogs ice pores

24.01.2017 | Earth Sciences

Synthetic nanoparticles achieve the complexity of protein molecules

24.01.2017 | Life Sciences

PPPL physicist uncovers clues to mechanism behind magnetic reconnection

24.01.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>