Innovation and Corporate Value: Examining Differential Effects Across Defense, Defense IT, and Non-Defense Industries

Abstract

This study aims to empirically analyze the relationship between innovation and corporate value and examine the differential effects across the defense, defense IT, and non-defense industries. Using a sample of manufacturing firms listed on the Korea Exchange's KOSPI market from 2011 to 2021, excluding those issuing preferred stocks, we use the ratio of R&D expenditures as a proxy for innovation and measure corporate value based on Merton's (1974) model. The analysis reveals that innovation has a significant positive (+) relationship with corporate value; however, excessive innovation negatively impacts corporate value, forming an inverted U-shaped relationship. This suggests that excessive investment in innovation may impose financial burdens on firms or fail to generate expected returns. Furthermore, the comparative analysis among the defense, defense IT, and non-defense industries shows that the positive impact of innovation on corporate value is lower in the defense industry than in non-defense industries. This difference is found to be statistically significant, implying that the structural characteristics of the defense industry, including government regulations and policy factors, may influence the effectiveness of innovation. Additionally, the defense IT industry exhibits distinct innovation dynamics, highlighting the need for industry-specific strategic approaches to maximize corporate value through innovation. By providing a comprehensive comparison across these industries, this study contributes to a deeper understanding of how innovation affects corporate value differently depending on industry characteristics.