DOES A COMPANY'S INNOVATION
diminish after its initial public offering? To a large extent, yes, according to researchers Simone Wies of Goethe University in Frankfurt, Germany, and Christine Moorman of Duke University’s Fuqua School of Business in Durham, North Carolina. Wies and Moorman find that newly public companies are likely to play it safe after their IPOs, bringing greater variety of their existing products to market rather than creating completely new product lines.
The pair compared more than 40,000 products released by 207 companies that went public between 1980 and 2011 to more than 18,000 products released by 158 private companies during the same time frame. They found that while the newly public companies introduced more products, few of those products broke new ground or targeted new markets. As an example, a yogurt company might issue more varieties of yogurt after its IPO, they note, but not a new line of yogurt-covered snack bars.
The researchers believe that many companies lose their innovative steam after their IPOs not because they hire more conservative managers or spend all of their innovative energy on pre-IPO activity. Instead, a public company’s greater visibility and responsibility to shareholders might make its leaders less inclined to take big risks.
“Going public forces companies to make extensive disclosures to the stock market—disclosures that competitors see and might exploit,” says Moorman. “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.”
Wies adds that once leaders are aware of the stock market’s effect on innovation, they can be better positioned to counteract it, “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.”
“Going Public: How Stock Market Listing Changes Firm Innovation Behavior” is forthcoming in the Journal of Marketing Research.