Innovation is nowadays a primary key success factor and among the most important capacities to maintain competitive advantage in a fast-changing world. In their recent paper, Boubaker, Guizani, and Lakhal examine the effect of firm innovation on stock price crash risk. Using a sample of French publicly-traded firms covering 2007–2016, they find that innovative firms are more likely to experience stock price crashes, suggesting that these firms are plagued with exacerbated information asymmetry and that they conceal bad news to maintain high stock prices as managers exhibit optimistic expectations about the future.
Moreover, their results show that the positive association between innovation and stock price crash risk is more prevalent in highly-competitive markets, which is consistent with the idea that innovative firms increase their financial opacity in the presence of competitive pressure to protect their innovation strategies. This finding alo supports the idea that product market competition is associated with low information quality environments. The relationship between innovation and stock price crash risk is less pronounced when the firm has high financial analyst coverage, suggesting that analysts play a good governance that is likely to hinder the opacity of innovative firms and constrain them to disclose bad news to the market on a regular basis.
