Innovation's Effect on Firm Value and Risk: Insights from Consumer Packaged Goods

Journal of Marketing, Vol. 72, pp. 114-132, March 2008

UIC College of Business Administration Research Paper No. 08-03

21 Pages Posted: 11 Sep 2008 Last revised: 4 May 2013

See all articles by Alina Sorescu

Alina Sorescu

Texas A&M University - Department of Marketing

Jelena Spanjol

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Date Written: March 1, 2008

Abstract

What is the relationship between innovation and firm value? Does the type of innovation make a difference? To answer these questions, the authors examine how breakthrough and incremental innovations affect three different facets of firm performance: normal profits, economic rents, and total firm risk. They argue that each of these metrics is of independent interest to shareholders and managers and that examining one without the others results in an incomplete picture of the true financial value of innovation. Using data on more than 20,000 new products from consumer packaged goods industries, the authors find that breakthrough innovation is associated with increases in both normal profits and economic rents and that, on average, each breakthrough innovation in the sample is associated with an increase in firm value of $4.2 million. Breakthrough innovation is also associated with increases in the risk of the innovating firm, but this higher risk is offset by above-normal stock returns. In contrast, incremental innovation is associated with increases in normal profits only and has no impact on economic rents or firm risk.

Keywords: innovation, shareholder value, firm risk, marketing strategy, marketing-finance interface

JEL Classification: C31, C32, D21, G14, L1, L2, L66, M3

Suggested Citation

Sorescu, Alina and Spanjol, Jelena, Innovation's Effect on Firm Value and Risk: Insights from Consumer Packaged Goods (March 1, 2008). Journal of Marketing, Vol. 72, pp. 114-132, March 2008; UIC College of Business Administration Research Paper No. 08-03. Available at SSRN: https://ssrn.com/abstract=1265847

Alina Sorescu (Contact Author)

Texas A&M University - Department of Marketing ( email )

430 Wehner
College Station, TX 77843-4218
United States

Jelena Spanjol

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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