Bauer Professor Praveen Kumar Focuses on Finance for Innovative Investments in Co-Authored Journal of Finance Research
In order to create new technologies and move the economy forward, firms need to invest in the ability to develop innovations, according to recent Bauer College research.
Firms that invest in building their innovative capacity are rewarded over the long run by higher stock market returns and profits, a new study co-authored by Bauer College Professor Praveen Kumar finds.
Kumar, also the chair of the college’s Department of Finance, worked with University of South Carolina Professor Dongmei Li to analyze the long run financial market and profitability implications of investments by these companies.
“Scientific breakthroughs generally benefit the economy only when they are developed into products and technologies that improve people’s quality of life,” Kumar said. “Commercializing and developing these breakthroughs require large investments by innovative firms. Analyzing the long run financial rewards of investments in innovation are crucial to understanding the prospective economic impact of STEM initiatives.”
Their study, published in the October issue of the Journal of Finance, argues that by looking at traditional and investments in innovative capacity separately, firms can identify a difference in stock market and profitability response, which is not apparent when the two are grouped together.
“Previous research shows that stocks of companies undertaking high rates of capital investment generally tend to underperform immediately following the investment,” Kumar said. “But, the available research does not distinguish innovative capacity investment from traditional capital investment or identify the stock market response to investment in innovative capacity.”
He added: “If innovative and traditional investment companies are pooled together, we tend to observe that stock markets punish higher investments, at least in the short run.”
By separating the investments, large research and development firms, with greater financial resources to ultimately develop innovations, are rewarded over time by the stock market, generating higher profits, leading to shareholders gaining more in the longer run.
“This is important information for managers of these companies since it encourages them to invest in an innovative capacity, which would lead to development of new products and technologies, which is helpful for the entire economy,” Kumar added.
By Amanda Sebesta