Firm Innovation and the Ratchet Effect Among Consumer Packaged Goods Firms

We consider how public firms influence their stock market valuations by timing the introduction of innovative new products. Our focus is on innovation ratchet strategy—firms timing the introduction of innovations in order to demonstrate an improvement in the number of introductions over time. We document that public firms use an innovation ratchet strategy more often than do private firms and that the stock market rewards public firms for doing so. These rewards from the stock market, however, come at the expense of performance in product markets. Specifically, because firms using an innovation ratchet strategy delay some product introductions, they have significantly lower sales growth in the year they ratchet. Finally, we identify firm and market characteristics that influence the likelihood that a public firm will engage in an innovation ratchet strategy.