Combating the Wall Street Curse on Firm Product Innovation

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Recent anecdotal evidence has stimulated much debate about the extent to which the stock market impedes firm innovation efforts. Previous research shows that after accessing the stock market, firms curb their breakthrough product innovations. This effect is ascribed to the short-term pressures the stock market exerts on firms. Academic research, arguably, does not yet understand how to prevent this drop in innovativeness. The objective in the proposed project is hence to examine whether there are firms that do not succumb to stock market pressures and continue to introduce breakthrough innovations despite being publicly listed and what firm factors explain this resistance. I offer two firm factors that reflect choices in how firms manage their innovation strategy before and after the IPO that might buffer them from the tendency to take less innovation risk post-IPO: a firm’s pre-IPO tolerance for failure inherent in the firm’s culture and the firm’s post-IPO value appropriation capabilities. These factors complement extant work that has focused on post-IPO industry- or financial market-specific factors remote from the threatened innovation outcomes. My findings could challenge the view that the stock market, per se, causes firms to behave in a short-term manner and could offer a more optimistic and agentic view of how firms can maintain their innovativeness after accessing the stock market.