Market Response to Innovation Projects: The Evidence From the Russian Financial Market

The aim of this study is to analyze the character of the financial market's response to information on innovative investments made by Russian companies. The key objective of investments is to create value, so the research question is whether investors perceive value creation from innovative investments. This problem has an increasing importance during crisis period. Managers should maximize value for their shareholders, but due to the rationing of capital, they need signals regarding which types of innovations are able to create value. These signals are provided by the market: if share prices are going up after the announcement on innovation-based investment, it can mean that investors believe that this new product, technology or service is valuable and promising. Though the Russian market is the focus of this study, the problem has a broader importance. In theory, innovation is considered to be one of the most important drivers for companies' development and competiveness; nevertheless, many researchers, analysts and managers fear that firms do not invest enough in innovation. Some critics assert that an earnings-focused, short-term orientation on stock prices may decrease the amount of investments in innovation that typically have a long payback period and bear high risks. However, accurately assessing market returns may be critical to understanding how markets respond to innovation and motivate firms to invest in innovation. Using event study, we tested the sample of 149 announcements on companies' investments in innovation projects. The data sample consists of announcements of companies traded on the Moscow Interbank Currency Exchange between 2008 and 2013. To reveal differences in reaction to special types of innovation, a regression analysis was implemented. The main finding of the study is that the cumulative average abnormal returns to all announcements in the sample are positive.