Corporate innovation strategy and stock price crash risk

We examine the association between corporate innovation strategy and future stock price crash risk. Using a large sample of US firms for the period 1992-2012, we find that exploration-oriented (exploitation-oriented) firms are more (less) prone to stock price crash risk. An examination of underlying mechanisms suggests that compared with exploitative firms, exploratory firms incur a higher failure-to-success ratio and are less likely to disclose interim negative news about their innovation projects. The documented relationships are stronger for firms with more severe agency problems and lower governance quality. Our findings advance the understanding of the capital market consequences of corporate innovation strategy and major catalysts for stock price crash risk.