Academic literature recognizes innovation as one of the main drivers of a company’s stock value, but experience says that it’s not always the case and that, when it is, the magnitude of the effect can vary wildly. New research by Bocconi University and Texas A&M scholars proposes a finer-grained view asserting that:
- The reaction of large individual investors to innovation is an important component of stock returns;
- Their reaction to innovation depends on their national culture;
- There is a way to segment large individual investors and pitch innovation to them accordingly.
Large individual investors are the likes of Oprah Winfrey, whose purchase of a 10% stake in Weight Watchers in October 2015 generated $700 mln in stock market value for the company in the following two days, or the Indian investor Rakesh Jhunjhunwala, whose stock holding decisions caused a 13% stock price increase in Prakash Industries and a 12.4% decrease in Design Arena in recent times.
The study covers the listed companies that introduced at least one new product in the food and beverage industry worldwide in the 2006-2014 time frame, for a total of 56 firms on 27 stock markets, and 458 large individual investors. The general link between innovation and stock return is supported and the cultural bias of large individual investors, which depends on their nationality, turns out to affect this relation. “Stock market returns”, lead author Paola Cillo, a Professor of Management at Bocconi University, says, “may be negative if the firm has many large investors from cultures that do not value innovation”.
The authors define a national culture according to the six dimensions of Hofstede’s framework and observe that cultures more conducive to innovativeness are those:
power distance (hierarchical societies)
indulgence (the importance of personal gratification)
Cillo and her colleagues also list 97 countries according to the number of cultural dimensions strengthening or weakening the relationship. The countries that most appreciate innovation in food and beverage industries are Belgium, Brazil, France, and Turkey, while the only ones with more cultural dimensions that weaken the relation than those that strengthen it are Iraq, Ireland, and Italy.
“It doesn’t mean that these are the countries that value innovation the most and the least in absolute”, Paola Cillo warns, “This analysis helps us identify what cultural traits trigger or hinder a positive response to innovation for each large individual investors”.
Co-author Gaia Rubera, a Professor of Marketing at Bocconi University, adds: “Then, we can show executives how to apply traditional marketing concepts such as segmentation, targeting and positioning to investors too (and not only to consumers) in order to increase stock returns from their innovations”. In a section exceptionally useful for executives, the authors suggest how to position innovation according to investors’ cultural traits. Innovation, for example, should be defined as a way to reach worldwide recognition to investors high on masculinity, but as a way to contribute to the overall welfare of society to those low on the same cultural trait.