Technological Change and Stock Return Volatility: Evidence from eCommerce Adoptions

Abstract:     
This paper is among the first to use a unique controlled empirical setting - traditional firms' adoption of the Internet for commerce - to investigate the impact of changes in firms' technological environment on their stock return volatility. Using three distinct empirical methodologies we detect a significant increase in the idiosyncratic and total stock return volatility when a firm initiates eCommerce. Interestingly, this increase in volatility is observed only for firms that moved online post-June 1998, a period when Internet growth reached critical mass. We find that this increase in volatility is attributable to changes in the firms' product markets, specifically increased demand uncertainty, resulting from the adoption of a new technology-driven channel. We also find that the volatility increase is highest for retailers followed by manufacturers and service firms. Relevant controls rule out firm-specific characteristics as well as market microstructural factors as possible explanatory variables. Our results provide strong evidence of the impact of real activity within a firm on its stock return volatility and highlight the importance of understanding the impact of technological innovations on firms' risk-return profiles.

Keywords: Product Market Changes, Stock Return Volatility, eCommerce, Technology Adoption

JEL Classifications: D80, G12, G14, O33

Working Paper Series