Two Centuries of Innovations and Stock Market Bubbles

Alina Sorescu (), Sorin M. Sorescu (), Will J. Armstrong () and Bart Devoldere ()
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Alina Sorescu: Mays Business School, Texas A&M University, College Station, Texas 77843
Sorin M. Sorescu: Mays Business School, Texas A&M University, College Station, Texas 77843
Will J. Armstrong: Rawls College of Business, Texas Tech University, Lubbock, Texas 79409
Bart Devoldere: Bart Devoldere Vlerick Business School, 9000 Ghent, Belgium; Netherlands Organisation for Applied Scientific Research, 2595 DA The Hague, Netherlands; TomorrowLab, 1800 Vilvoorde, Belgium

Marketing Science, 2018, vol. 37, issue 4, 507-529

Abstract: The interplay between innovation and the stock market has been extensively studied by scholars across all business disciplines. However, one phenomenon remains understudied: the association between innovation and stock market bubbles. Bubbles—defined as rapid increases and subsequent declines in stock prices—have been primarily examined by economists who generally do not focus on individual characteristics of innovations or on the consequences of bubbles for their parent firms. We set out to fill this gap in our paper. Using a sample of 51 major innovations introduced between 1825 and 2000, we test for bubbles in the stock prices of parent firms subsequent to the commercialization of these innovations. We identify bubbles in 73% of the cases. The magnitude of these bubbles increases with the radicalness of innovations, with their potential to generate indirect network effects, and with their public visibility at the time of commercialization. Moreover, we find that parent firms typically raise new equity capital during bubble periods and that the amount of equity raised is proportional to the magnitude of the bubble. Finally, we show that the buy-and-hold abnormal returns of parent firms are significantly positive between the beginning and the end of the bubble, suggesting that these innovations add value to their firm and to the economy, in spite of the bubble. Our findings have important implications for managers interested in commercializing innovations and for policy makers concerned with the stability of the financial system.

Keywords: radical innovation; stock market bubbles; capital raised; diffusion; visibility; network effects (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:37:y:2018:i:4:p:507-529

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