Companies Going Public Are Playing It Safe

May 19, 2015

New research shows when companies go public, they release more new products but are less likely to develop breakthrough innovations that offer new benefits or use new technologies, preferring to offer variations on their existing products and selling them to existing markets.

A yogurt manufacturer, for example, will issue more varieties of yogurt after going public but is less likely to come out with, say, yogurt-covered snack bars, according to new research by Professor Christine Moorman of Duke University's Fuqua School of Business.

Moorman, along with Simone Wies of Goethe University in Frankfurt, studied how exposure to the stock market affected the amount and the type of innovation companies tend to generate. Their research, "Going Public: How Stock Market Listing Changes Firm Innovation Behavior," is forthcoming in the Journal of Marketing Research.

"There's a lot of focus on how marketing affects the stock market, whether firms see a bump from developing strong customer relationships or strong brands," Moorman said. "We addressed the opposite question: How does the stock market actually effect what companies do?"

The team examined more than 40,000 product releases by 207 companies that went public between 1980 and 2011. They compared that data to a benchmark sample of 158 companies that stayed private and issued more than 18,000 products in the same span. Previous research on innovation focused on patents or budgets for research and development.

"We think that if you're going to investigate the effects of the stock market on company behavior you want to look at actual new products, because that's where the rubber meets the road," Moorman said. "What we find is that when firms go public, two critical things happen. First, they do, on average, innovate more. The sheer number of new products that they introduce goes up. But they don't develop really new or breakthrough products or target new markets. In fact, they reduce the number of really innovative products, and are less likely to introduce into new product categories they have not been in before."

Moorman said the extra capital available to companies that go public likely generates the increase in products.

"On the other hand, going public forces companies to make extensive disclosures to the stock market-disclosures that competitors see and might exploit," she said. "Those requirements, along with the short-termism that is very clearly going on within the stock market, mean those new products companies are releasing are more incremental in nature."

The researchers were careful to sift through other factors that could have influenced their findings.

"We spent a lot of time trying to rule out these other things that could be happening," Moorman said. "For example, when a company goes public, maybe it fires all its risk-taking managers and hires a bunch of conservative managers. But we found that doesn't happen. Maybe companies are dressing up for the IPO and want to look as innovative as they can, so they do a lot of innovation beforehand, then it flattens out and drops off. That's not the case either. Finally, maybe the companies that go public are just more conservative in nature; but this is not what we find. We resolve a lot of these alternative explanations."

The findings can be useful for firms considering a stock market listing, and for those wanting to avoid the tendency to scale back on breakthroughs after going public, Wies said.

"It can help companies, whether it's through culture or a structure that facilitates a certain kind of communication, so people don't get stuck in these narrow ways of approaching the market," she said. "The stock market is not just evaluating what companies do, it's having this formative effect on firm strategy that's important for companies to realize."

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