Financial market reactions following technological discontinuities: a non-event study in two industries

Abstract

A large body of literature has explored the challenges of technological change for established firms. Much of this work has focused on factors internal to firms, such as inertial routines or managers’ cognitive limitations that constrain incumbents’ development of new capabilities and response to new technologies. But institutional pressures arising from financial markets and the securities analysts who mediate such markets likely also play a role in whether and how incumbent firms respond to technological change. We know little about how financial markets and securities analysts react as an incumbent firm is faced with a radical technological discontinuity that threatens to substitute for the existing technology. Understanding such reactions is critical, as they further influence whether and how incumbents respond to technological discontinuities. In this article, I explore securities analysts’ reactions to incumbent firms faced with technological discontinuities in two industries: digital technology in photography, and Voice over Internet protocol (VoIP) technology in wireline telecommunications. I find that these discontinuities go largely unmentioned in analysts’ reports and appear to have little influence on analysts’ recommendations or stock prices even for several years. The findings suggest further that analysts and investors continue to reward incumbents for cash flows arising from focusing on the existing business and technology despite the increasing certainty of technological obsolescence.