Product Market Power and Technological Innovation

52 Pages Posted: 16 Mar 2022

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Ji Woo Ryou

West Virginia University

Xiao-Jun Zhang

University of California, Berkeley; China Academy of Financial Research (CAFR)

Date Written: February 17, 2022

Abstract

Product market power serves as a natural hedge against adverse shocks and competitive threats, thus increasing managerial risk tolerance of innovation investment. Consistent with that, we find that product market power is positively associated with firm innovation input and output. Additionally, consistent with learning from the leader’s market valuation, we find that firm innovation is positively and significantly sensitive to market valuation of its product market leader, especially if the stock price of the leader/followers is more/less informative. The follower firms alter their R&D investments based on stock return around their leader’s patent grant dates. The followers mimic innovation investments of their product market leader and private information in leader’s prices is associated with improvement in their future profits. We find that liquidity shocks to leader’s stock price hamper the following firms’ learning. We conclude that product market power promotes innovation and firms learn from product market leader’s market valuation.

Keywords: Product market leader, learning, technological innovation, market valuation, accounting quality

JEL Classification: G14, G31, M41

Suggested Citation

Barinov, Alexander and Hong, Hyun A. and Ryou, Ji Woo and Zhang, Xiao-Jun, Product Market Power and Technological Innovation (February 17, 2022). Available at SSRN: https://ssrn.com/abstract=4037180 or http://dx.doi.org/10.2139/ssrn.4037180

Alexander Barinov (Contact Author)

University of California Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
585-698-7726 (Phone)

HOME PAGE: http://faculty.ucr.edu/~abarinov/

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Ji Woo Ryou

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States

Xiao-Jun Zhang

University of California, Berkeley ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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