How do Stock Market Expectations Condition Incumbents’ Response to Radical Technological Change?

Prior research is inconclusive on how incumbents respond to radical technological changes. Whereas one stream of research emphasizes the ability of market incumbents to be better positioned to appropriate value from a radical technological change, another stream highlights the challenges encountered by them in the face of a radical technological change. We examine how shareholder preferences for current profitability relative to future growth shape incumbents’ responses to a radical technological change and how different facets of corporate governance moderate the extent to which shareholder preferences condition incumbents’ responses to radical technological changes. Using a rich dataset comprising 34,673 non-ICT producing incumbent-year pairs spanning 1984-2010, we find that a standard deviation increase in the extent to which incumbents are valued current profits decreases incumbents’ ICT adoption by about 10% a year, whereas a similar increase in the extent to which incumbents are valued for their future profits increases ICT adoption by about 5% a year. Our results also highlight the key role of corporate governance in moderating these effects. We advance the rich body of work that examines incumbents’ responses to technological changes by highlighting the significance of external stakeholders in shaping the competitive advantage of incumbents.