Technological Change and Stock Return Volatility: Evidence from eCommerce Adoptions

This paper is among the first to use a unique controlled empirical setting traditional firms’ adoption of the Internet for commerce to investigate the impact of changes in firms’ technological environment on their stock return volatility. Using three distinct empirical methodologies we detect a significant and corresponding increase in the idiosyncratic and total stock return volatility when a firm initiates eCommerce. Interestingly, this increase in volatility is observed only for firms that moved online post-June 1998, a period when Internet growth reached critical mass. An increase in the implied volatility of at-the-money call options of our sample firms reinforces our findings. We find that this increase in volatility is attributable to changes in the firms’ product markets, specifically increased demand uncertainty, resulting from the adoption of a new technology-driven channel. Relevant controls rule out firm-specific characteristics as well as market microstructural factors as possible explanatory variables. We also find that this surge in volatility is accompanied by a positive abnormal return of stock prices. Overall, our results provide strong evidence of the impact of real activity within a firm on its stock return volatility and highlight the importance of understanding changes in firms’ technological environment.