Capital Market Feedback and Corporate Innovation

Posted: 15 Mar 2021

See all articles by Mustafa Ahci

Mustafa Ahci

Tilburg University School of Economics and Management

Tim Martens

Bocconi University - Department of Accounting

Christoph J. Sextroh

Tilburg University - Tilburg School of Economics and Management

Date Written: March 12, 2021

Abstract

We investigate the effect of capital market feedback on corporate investment in innovation. To identify changes in firms' behavior in response to capital market feedback, we exploit the launch of the USPTO's Public Patent Application Information Retrieval (PAIR) system that made internal information about the patent application process publicly available. Consistent with the existence of feedback, we document that market reactions to patent grants change after the launch of the PAIR system. More importantly, variation in feedback correlates with firm behavior and predicts future investment in innovation as captured by project continuation decisions, patent renewals, and the direction of future patent applications. Firms that facilitate capital market feedback by making a larger fraction of application information publicly available also produce more valuable innovations in the future. Taken together, our results indicate not only that corporate investment in innovation is affected by capital market feedback, but also that the feedback effect is more pronounced the more information about the innovation process is publicly available.

Keywords: Capital market feedback; Corporate innovation; Corporate investment; Disclosure; Managerial learning

JEL Classification: D83, O30

Suggested Citation

Ahci, Mustafa and Martens, Tim and Sextroh, Christoph J., Capital Market Feedback and Corporate Innovation (March 12, 2021). Available at SSRN: https://ssrn.com/abstract=3803324

Mustafa Ahci

Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tim Martens

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Christoph J. Sextroh (Contact Author)

Tilburg University - Tilburg School of Economics and Management ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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