Do Innovations Really Payoff? Total Stock Market Returns to Innovation

Marketing Science, Vol. 28, No..3, p. 442, May/Jun 2009

Marshall School of Business Working Paper No. MKT 11-09

49 Pages Posted: 17 Apr 2008 Last revised: 14 Jun 2010

See all articles by Ashish Sood

Ashish Sood

University of California Riverside

Gerard J. Tellis

University of Southern California - Marshall School of Business, Department of Marketing

Date Written: 2008

Abstract

Critics often decry an earnings-focused short-term orientation of management that eschews spending on risky, long term projects such as innovation in order to boost a firm's stock price. The critics' assume that stock markets respond to announcements of earnings that report immediate earnings and not of innovation that have a long-term payoff. Contrary to this position, the authors argue that the market's true appreciation of innovation can be estimated by assessing the total market returns to the entire innovation project The authors demonstrate this approach via the Fama-French 3 Factor Model (including Carhart's Momentum Factor) on 5481 announcements from 69 firms in 5 markets and 19 technologies, during the period 1977-2006.

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 negative events are higher in absolute value than those to positive events. Returns to development activities are higher than returns to either the setup or market activities. Returns are higher for smaller firms than larger firms. Returns to the announcing firm are substantially greater than those to competitors across all stages. The authors discuss the implications of the results.

Keywords: Innovation, Market Returns, Event Study, Fama-French model, High-Tech Marketing

Suggested Citation

Sood, Ashish and Tellis, Gerard J., Do Innovations Really Payoff? Total Stock Market Returns to Innovation (2008). Marketing Science, Vol. 28, No..3, p. 442, May/Jun 2009, Marshall School of Business Working Paper No. MKT 11-09, Available at SSRN: https://ssrn.com/abstract=1121005

Ashish Sood

University of California Riverside ( email )

United States
6782059931 (Phone)

HOME PAGE: http://www.ashishsood.net

Gerard J. Tellis (Contact Author)

University of Southern California - Marshall School of Business, Department of Marketing ( email )

Hoffman Hall 701
Los Angeles, CA 90089-0443
United States
213-740-5031 (Phone)
213-740-7828 (Fax)

HOME PAGE: http://gtellis.net

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