Innovation and expert evaluations : the influence of a firm's approach to innovation on assessments in financial markets
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Prior research shows that when a firm uses an approach to innovation based on diverse, distant, and distinctive knowledge it can enhance its ability to develop innovations. However, less is known about how such an approach to innovation affects evaluations in financial markets by securities analysts and investors. In this dissertation I examine how a firm’s approach to innovation influences its ability to attract coverage and favorable recommendations from securities analysts. After considering the influence of innovation on analysts’ evaluations, I examine how analysts’ recommendations, in turn, influence a firm’s ability to attract investment. I argue that when a firm uses an approach to innovation based on diverse, distant, and distinctive knowledge it may complicate securities analysts’ efforts to evaluate its strategy, which may make them less willing to provide the firm with coverage and favorable recommendations. I also explore how disagreement among securities analysts’ recommendations may create opportunities for investors, which can ultimately help a firm to attract investment. This dissertation contributes to strategy research by highlighting an important trade-off related to a firm’s approach to innovation. Whereas prior research has shown that using diverse, distant, and distinctive knowledge helps a firm to develop knowledge-based resources, this research, in contrast, shows that such an approach to innovation may hinder efforts to capture value from these resources in financial markets. This research also contributes to the literature on financial intermediaries. It shows that financial markets are not fully intermediated by analysts’ recommendations and that uncertainty reflected in disagreement among analysts’ recommendations can signal valuable opportunities for investors that will make them more likely to buy shares in a firm. Furthermore, it also shows that characteristics of investors and aspects of a firm’s innovation strategy, which enhance investors’ ability to identify and profit from opportunities that arise under uncertainty, will make investors even more likely to buy shares when analysts disagree about their recommendations.