Value effect of rival innovation failure: competition or contagion?

Haoping Xu, Xin Zhang, Lu Liu and Jianqiao Hong

China Journal of Accounting Studies, 2017, vol. 5, issue 4, 449-467

Abstract: This paper investigates how the value of firms is affected by rival R&D projects. In particular, we utilise a unique event (i.e. the failure of the R&D project in Hepatic vaccine in Chongqing Brewery) to investigate the market response to the announcement of failure in R&D investment in a rival firm. The competition (contagion) hypothesis predicts a positive (negative) market reaction. Our results show a strong negative market reaction, indicating that the contagion effect dominates the scene. We also show that the negative effects are more pronounced in firms with core business in the vaccine industry, reinforcing our main evidence supporting the contagion effect. Moreover, our evidence suggests that such an effect is more pronounced in firms with a higher degree of uncertainty. Our study has important contributions to the literature as well as policy implications.

Date: 2017
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DOI: 10.1080/21697213.2017.1423777

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