Alina B. Sorescu & Jelena Spanjol
Executive Summary
What is the relationship between innovation and firm value? Is the type of innovation introduced by firms (i.e., breakthrough or incremental) associated with changes in firm value and risk? To answer these questions, the authors examine the relationship between breakthrough and incremental innovation and 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. They measure normal profits and economic rents using Tobin’s Q and long-term abnormal stock returns, and they measure risk using the volatility of stock returns. The sample includes more than 20,000 new products introduced by 153 firms from consumer packaged goods industries between 1985 and 2003. The authors find that breakthrough innovation is associated with increases in both normal profits and economic rents and that each breakthrough innovation in the sample is associated with an average 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 more than 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. The findings have implications for the corporate governance literature. The authors uncover a significant trade-off that managers must make in the pursuit of breakthrough innovation. On the one hand, breakthroughs are rewarding for shareholders, even when accounting for the associated increase in firm risk. On the other hand, this additional risk may negatively affect the welfare of other stakeholders, who could conceivably prefer lower levels of breakthrough innovation. Ultimately, the propensity to innovate may depend on how well management incentives are aligned to those of shareholders. Another implication of this study is that marketing innovation is just as worthy of attention in the boardroom as technological innovation. The authors find that packaging and merchandising innovations, despite not being technological marvels, can be the source of significant economic rents.
Biography
Alina B. Sorescu is Assistant Professor of Marketing and Mays Research Fellow in the Mays Business School at Texas A&M University. Her research interests lie in the marketing–finance interface, particularly in measuring the effect of marketing assets and activities on shareholder value. She is currently doing research on innovation, business models, branding, market entry and acquisitions. Her publications have appeared in Journal of Marketing Research, Journal of Marketing, Journal of Advertising, and Journal of Advertising Research. She has received several awards for her research, including the AMA John A. Howard Dissertation Award and the Academy of Marketing Science Mary Kay Dissertation Award.
Jelena Spanjol is Assistant Professor of Marketing at the University of Illinois at Chicago. Her research interests include new products, product market dynamics, and marketing strategy. Professor Spanjol’s research has been published in Journal of Marketing, Journal of the Academy of Marketing Science, and in various book chapters. She received her BS in Economics and PhD in Business Administration from the University of Illinois at Urbana–Champaign.
Journal of Marketing, Vol. 72, No. 2, March 2008
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