Does the stock market reward innovation? European stock index reaction to negative news during the global financial crisis |
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Institution: | 1. Essex Business School, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, UK;2. Sheffield Management School, University of Sheffield, Conduit Road, Sheffield S10 1FL, UK;1. Department of Business Administration, National Taipei University, Taipei, Taiwan;2. Department of Finance, National Taiwan University, Taipei, Taiwan;3. Department of Finance, China University of Technology, Taipei, Taiwan |
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Abstract: | This study uses data on 27 European stock indices over the period from January 2007 to December 2012 to investigate the relationship between innovations and the market reaction to negative news during the financial crisis. We use the bivariate BEKK-GARCH approach to estimate time-varying betas and abnormal returns. We show that index prices of countries in the high (low) innovation groups experience significantly positive (negative) abnormal returns on and following the negative news announcement dates. We also find that index beta changes following the arrival of bad news is negatively associated with a country's innovativeness. This finding suggests that innovations promote economic stability and enhance investors' confidence in a country's ability to cope during difficult times. Thus, policy makers who are concerned with sustainable growth should encourage R&D investments by adopting effective policies and avoid unnecessary cuts in R&D expenditures even during times of crisis. A study of the pre-crisis period from January 2001 to December 2006, using the same methods, indicates that investors value innovation more during difficult times. |
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Keywords: | Innovation R&D investments Stock price reaction Time-varying betas G1 O2 O3 |
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