آیا بازار سهام به نوآوری پاداش میدهد؟ واکنش شاخص سهام اروپا به اخبار منفی در طول بحران مالی جهانی

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.

A recent OECD (2009) report suggests that the recession, which began with the financial crisis of 2007, has impacted research and development (R&D) in OECD countries. In the fourth quarter of 2008, a decline in R&D expenditure, or at best slower growth, was apparent. Moreover, R&D expenditure declined by a record 4.5% in 2009 across the OECD, with falls in all major OECD countries except South Korea and France. However, as is shown in this paper, the performance of stock markets in OECD countries during the crisis period has exhibited heterogeneity. The study reported in this paper sheds light on the role of innovation in building investor confidence and in stimulating economic recovery. The argument that motivates this work is that if innovation improves profitability and reduces investment costs, it should also increase investors’ confidence in a country’s ability to withstand the effect of difficult economic conditions. More specifically, if investors’ confidence increases with innovation, the stock markets of innovation-intensive countries would be less adversely affected by negative news about the global economy. We investigate this issue by examining the reaction of European stock market indices to the arrival of major negative news during the recent global financial crisis. We choose to focus our analysis on European markets for several reasons. First, Europe is a significant player in the global economy, with the GDP of the euro-zone area ($13 trillion) being almost equal to that of the US ($15 trillion). Secondly, whilst the financial crisis started in the US, its impact was greater and it lasted longer in Europe (Weisbrot, 2014). Thirdly, the European sovereign debt crisis had a significant effect on investors’ confidence and was blamed for the slow recovery in the US and the global economy. Finally, the considerable variations in European countries’ commitments to innovations and the fact that these countries are not affected in the same way by the financial crisis make Europe a perfect environment to study the link between innovation and a county’s ability to cope during difficult times. This paper is motivated both by theoretical literature and empirical evidence at firm and country level. Chen and Zhang (2010) develop a model in which firms with higher expected profitability and lower investment costs provide higher expected returns. To test whether the market rewards innovation, existing empirical studies focus almost exclusively on the impact of R&D investments and patents on firm value (see for example Griliches, 1981; Jaffe, 1986; Hall et al, 2005), the short-term stock price reaction to R&D announcements (for example Chan et al, 1990; Saad and Zantout, 2009) and the long-term stock returns associated with past R&D investment (for example Chan et al, 2001; Eberhart et al, 2004). However, the results of these studies are far from conclusive. For example, Chan et al (2001) find firms with higher R&D investment experience no better long-term risk-adjusted excess returns than the rest of their sample firms. However, Porter (1992), Hall (1993) and Hall and Hall (1993) show that investors fail to foresee the rewards from long-term R&D investments and thus undervalue R&D-intensive stocks. Eberhart et al (2004) show that firms exhibit significant positive risk-adjusted excess returns for the five-year period following R&D expenditure increases. They interpret it as an evidence of investors’ under reaction to the benefit of R&D increases. While several studies show that innovations stimulate economic growth (Aghion and Howitt, 1992; Grossman and Helpman, 1991; Solow, 1956) and promote nations’ competitive advantage (Porter, 1998), evidence on the relationship between innovations and aggregate stock market returns is relatively scarce. Hsu (2009) argues that if innovation raises the expected productivity and profitability of the representative firm, it should also improve the overall efficiency and reduce investment costs at the aggregate level. Consistent with this prediction, Hsu finds that innovations have positive and distinct predictive power for U.S. and other countries market returns and premiums. The study in this paper also uses country level data to investigate the relationship between innovation and market returns and premiums. However, unlike Hsu (2009), who attempts to explain the time series of market returns using innovation shocks, we investigate the behaviour of market returns and betas following the arrival of negative news about the global economy. This leads to new insights about the relationship between innovation and investor confidence in a country’s ability to cope during difficult economic climates. We argue that the productivity and efficiency benefits associated with innovations are likely to be even more crucial during crisis periods, particularly as customers switch to lower-priced products/services providers in order to reduce their expenditure. This argument suggests that firms and economies with continued investments in innovations are more likely to survive the recession and position themselves well for the recovery periods, whereas others may be forced to cut their R&D expenditure to ensure short-term survival at the expense of the long-term performance (see, for example, Smallbone et al, 1999). Thus, if innovations help firms to respond properly in times of trouble, investors might be less worried about losing their wealth in times of trouble and may therefore react less adversely, or even positively, to the arrival of negative news about the global economy. To investigate this issue, we estimate abnormal returns and time-varying betas for 27 European country indices around informed negative shocks. These which are defined as the World index returns in the lowest 5th percentile that can be matched with the timelines of the crisis released by the BBC, European Central Bank (ECB), Federal Reserve Bank of St Louis and The Guardian1 newspaper. We argue that if innovations enhance investors’ confidence, one would expect a positive association between innovation measures and event day abnormal returns, as recessions may have less adverse effect on the competitiveness and profitability of firms in innovation-intensive economies. We also examine the effect of innovation on the co-movement of local stock market indices and the World index during crisis periods. As above, it can be argued that the stability of economies with continuous investments innovations is less likely to be threatened by recession, as firms in these markets are better equipped to cope with the challenges imposed by global economic downturns. Thus, negative news about the global economy should have less impact on the time varying betas, which are a measure of stability and riskiness, of stock markets of highly innovative countries. Taking into account different levels of innovation, we provide a direct comparison for 27 European markets. The innovation measures are based on government budget appropriations or outlays on research and development as a percentage of GDP, the actual R&D expenditures as a percentage of GDP, the ratio of knowledge based researchers to total employment and the number of patent applications per million inhabitants. The 27 countries are split into high (30%), medium (40%) and low (30%) innovation groups. Consistent with the investor confidence view, we show that countries with higher innovation measures experience much smaller negative stock price reactions to negative news events. The results also suggest that abnormal returns around days of informed negative shocks are positively related to the cross-country variation in innovation variables. The results are robust to different measures of innovation and after controlling for the effects of other economic variables. We also show that changes in stock market index betas tend to exhibit a negative association with a country’s innovativeness. This relationship is particularly pronounced when government support to R&D activities is used to measure innovation. We attribute the observed decline in the co-movement between innovation-intensive stock indices with the World index to the superior performance of highly innovative firms during global downturns. To investigate whether these findings are unique to the crisis period, the analysis is also carried out for the period January 2001 to December 2006. We find that the positive reaction of innovation-intensive country indices to the arrival of negative news is unique to the times of crisis. This finding indicates that investors value innovation more during difficult times. The paper is organized as follows. Section 2 provides a brief review of the literature and develops the hypotheses to be tested. Section 3 presents a brief description of the global financial crisis and its impact on the European countries. Section 4 presents the data, defines the variables and reports the descriptive statistics. Section 5 describes the methodology. Section 6 reports the empirical results and Section 7 discusses the implications of our findings and concludes.

The study uses country level data to test whether stock markets reward innovations. It contributes to the literature by linking innovations to investors’ confidence in a country’s ability to cope during times of economic and financial turmoil. We argue that if innovations enable firms and economies to develop distinct competitive advantage, which helps them to cope with difficult economic conditions and if investors can anticipate the rewards of innovations from a long-term prospective, the riskiness and value of stock market indices of highly innovative countries should be less vulnerable to the announcement of negative news about the global economy. We use the bivariate form of Engle and Kroner’s (1995) BEKK model to investigate the price and beta reaction of the European stock market indices to arrival of major bad news during the recent global financial crisis. The results of this study suggest that the stock market reaction to the arrival of negative news about the global economy do depend on a country’s innovativeness. Specifically, we find that stocks in innovation-intensive economies offer higher returns and lower risk during crisis episodes. This evidence implies that innovation helps firms and economies to cope better during crisis. It also implies that assets in highly innovative economies offer investors opportunities to protect their wealth in crisis times. Further analysis suggests that the positive cumulative abnormal returns and the beta declines observed in the case of innovation-intensive country indices following negative news are unique to the crisis periods. This evidence suggests that investors value innovation more during difficult times. Our findings also have important implications for both managers and policy makers. The positive index price reaction of innovation-intensive countries to the negative global economic outlook suggests that investors reward innovation. In other words, while commitments to R&D expenditures may hurt current earnings, they are necessary for competitive success (or even survival) during economic downturns. Thus, managers who are seeking to maximise shareholder wealth should continue to invest in innovation without fearing short-term negative effects on the stock price. Furthermore, as innovations contribute to economic stability, policy makers who are concerned with sustainable economic growth should encourage R&D investments by adopting effective polices, such as R&D tax credits and direct subsidies of private R&D projects. Governments should also avoid unnecessary cuts in R&D expenditures even during the crisis periods, as cutting R&D expenditure may have a significant negative impact on competitiveness the long-term. Becker and Pain (2008), for example, show that the poor performance of the UK manufacturing sector during the 1990s was caused by the decline in UK government financing of R&D projects in the preceding periods. The evidence reported in this study opens several other paths for future research. For example, it may be useful to investigate the relationship between investments in innovation and stock market liquidity during crisis episodes. This analysis may shed some light on the extent to which investor perceive innovative economies as places for safety during global economic downturns. Other extensions could shift the focus from stocks to other asset classes. For instance, it can be argued that if innovations promote economic stability, default risk of bonds and borrowing costs should exhibit a negative association with a country’s innovativeness.