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The Relationship between Innovation and Risk Taking: The Role of Firm Performance

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  • Yuni Pristiwati Noer Widianingsih

    (Accounting Department, STIE Swasta Mandiri Surakarta, Surakarta 57156, Indonesia
    Faculty of Economics and Business, Universitas Sebelas Maret, Surakarta 57126, Indonesia)

  • Doddy Setiawan

    (Faculty of Economics and Business, Universitas Sebelas Maret, Surakarta 57126, Indonesia)

  • Y. Anni Aryani

    (Faculty of Economics and Business, Universitas Sebelas Maret, Surakarta 57126, Indonesia)

  • Evi Gantyowati

    (Faculty of Economics and Business, Universitas Sebelas Maret, Surakarta 57126, Indonesia)

Abstract

One perspective suggests that firms heavily involved in innovation may face increased risks. It is essential to know the suitable proxies in measuring innovation related to risk taking. Many studies use research-and-development intensity (RDI) and research-and-development spending (RDS) as proxies for innovation related to risk taking. However, little evidence shows that positive association with risk taking. This study addresses this gap by using RDI and RDS as metrics for measuring innovation and assessing innovation-related risks. This study incorporated performance as a potential factor affecting the interaction between these variables. It is essential to consider the risks associated with innovation and allocate the RDI and RDS effectively to maximize revenue. We used a dataset of 3955 firm-year observations obtained from 548 listed firms in the Indonesian stock exchange for 2012–2021. We found that RDI and RDS positively affect risk taking. The test results show that the interaction between innovation and firm performance negatively affects risk taking. Thus, firm performance may mitigate the risks associated with innovation. Therefore, firms must balance their innovation projects with improved performance to minimize risks and achieve long-term success.

Suggested Citation

  • Yuni Pristiwati Noer Widianingsih & Doddy Setiawan & Y. Anni Aryani & Evi Gantyowati, 2023. "The Relationship between Innovation and Risk Taking: The Role of Firm Performance," Risks, MDPI, vol. 11(8), pages 1-13, August.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:8:p:144-:d:1211398
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    References listed on IDEAS

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    1. Mariana Mazzucato & Massimiliano Tancioni, 2008. "Innovation and idiosyncratic risk: an industry- and firm-level analysis," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 17(4), pages 779-811, August.
    2. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
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    4. Rajgopal, Shiva & Venkatachalam, Mohan, 2011. "Financial reporting quality and idiosyncratic return volatility," Journal of Accounting and Economics, Elsevier, vol. 51(1), pages 1-20.
    5. Alam, Ashraful & Uddin, Moshfique & Yazdifar, Hassan & Shafique, Sujana & Lartey, Theophilus, 2020. "R&D investment, firm performance and moderating role of system and safeguard: Evidence from emerging markets," Journal of Business Research, Elsevier, vol. 106(C), pages 94-105.
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