When a company floats its shares on the stock market what effect is that likely to have on its innovation strategy? According to a recent study, an IPO may not be very positive for a firm’s ability to keep innovating.
Either continuing to make creative progress or going for a stock market flotation. That seems to be the dilemma facing companies today according to investigations carried out by two researchers – Simone Wies at Goethe University in Frankfurt, Germany and Christine Moorman at Duke University in the United States. For their study entitled ‘Going Public: How Stock Market Listing Changes Firms’ Innovation Behavior’, published in the Journal of Marketing Research, the authors analysed a sample of over 40,000 new product introductions by 207 consumer packaged goods firms that embarked on an Initial Public Offering (IPO) of their equity between 1980 and 2011. Looking at the innovations produced by the companies before and after their IPO, they observed an increase in the number of new products and services following their stock market debut.
However, although the number of innovations had increased, the researchers found that the novelties tended to be far less creative and ‘disruptive’. ‟After an initial public offering, firms tend to introduce a larger number of innovations and a larger variety of each innovation—think different flavors, or different package sizes. But at the same time the innovations they do make are usually not the kind of breakthrough innovations that take the company in new directions and into new markets,” write the researchers.
Number of innovations (left) before and after an IPO, compared with the number of breakthrough innovations (right), which tends to fall following an IPO.
What could be the reasons for this negative impact of the stock market on real innovation? Wies and Moorman believe that having to answer to stockholders – who are generally more interested in the short term – may hamper the creative impulses of, for example, research and development departments. In addition, the requirements on stock exchange listed businesses to submit onerous financial disclosure reports may discourage them from taking sizeable risks on the innovation front.