Corporate Innovation Strategy,Analyst Forecasting Activities and the Economic Consequences |
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Authors: | Ning Jia |
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Institution: | The author is from School of Economics and Management, Tsinghua University at Beijing. The author is grateful for helpful comments from the Editor Peter Pope and an anonymous referee. The financial support of the National Natural Science Foundation of China (Project 71372049) and BNP Paribas‐Tsinghua SEM Center for Globalization of Chinese Enterprises is appreciated. The author remains responsible for any remaining errors or omissions. |
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Abstract: | We examine the impact of corporate innovation strategy on analyst following and forecasting performance, as well as the associated economic consequences. Using a sample of US firms from 1992?2012, we find that firms pursuing an exploration‐oriented innovation strategy (as opposed to an exploitation‐oriented innovation strategy) are associated with lower analyst coverage, higher forecast error and dispersion. The effect is less pronounced for firms with greater disclosure of innovation activities, and for firms followed by analysts with more firm‐specific experience. We also examine how innovation strategy affects the perceived credibility of analyst forecasts and find that investors appear to be less responsive to forecast revisions issued for exploratory firms. Such firms also incur a higher level of cash holdings, greater internal financing, and lower dividend ratio. The findings of this paper advance our understanding of how a public company's choice of innovation strategy affects its performance in the capital markets as well as the associated economic consequences. |
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Keywords: | innovation strategy exploration analyst forecasts internal financing dividend |
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