Innovation strategies and stock price informativeness

This paper models the interactions among technological innovation, product market competition and information leakage via the stock market. There are two …rms who compete in a product market and have an opportunity to invest in a risky technology either early on as a leader or later once stock prices reveal the value of the technology. Information leakage thus introduces an option of waiting, which enhances production e¢ ciency. A potential leader may nevertheless be discouraged from investing upfront, when anticipating its competitor to invest later in response to good news. I show that an increase in product market competition increases the option value of waiting but has an ambiguous e¤ect on information production. It may thus be the case that intense competition leads to more leakage such that no …rm would invest, especially so in a smaller market. Given a moderate level of competition, price informativeness may also improve investment outcome when investment pro…tability and the market size are relatively large. The model predicts that, under these conditions, the investment of a follower …rm is more sensitive to share price movements. JEL Classi…cation Code: G14, G31, D43 Keywords: Price e¢ ciency; Information leakage; Innovation; Feedback _____________________________ **Institute of Corporate Finance, Humboldt University, Dorotheenstr. 1, 10117 Berlin, Germany. I am grateful for helpful comments from Alexander Guembel, Bruno Biais, Sebastien Pouget, Guido Friebel, and other participants in the PhD workshop at Toulouse School of Economics, SERC 2013 and SAFE transparency conference. I thank also Christian Hellwig and Augustin Landier for valuable discussions and suggestions. The author gratefully acknowledges …nancial support from the Deutsche Forschungsgemeinschaft through SFB-TR15 "Governance and the E¢ ciency of Economic Systems. All errors remain mine.