Intensity of exploitation-exploration innovation strategies and credit ratings

Abstract

Our study explores how the intensity of corporate innovation strategies—exploration versus exploitation—affects firms’ credit ratings, an area largely unexplored. Explorative innovation emphasizes uncovering new knowledge, technologies, or markets, and is characterized by experimentation, risk-taking, and a high degree of uncertainty. On the other hand, exploitative innovation focuses on incremental improvements to existing products, processes, or capabilities, aiming to boost efficiency, reduce costs, and deliver short-term gains with lower risk. Analyzing 10,318 firm-year observations in the U.S. from 1985 to 2016, we find that firms adopting exploration (exploitation) intensive strategies tend to receive lower (better) credit ratings. These findings remain robust after addressing endogeneity and self-selection biases. Our results also hold when employing alternative measures of credit ratings and innovation intensity strategies. Our results suggest that the more disruptive exploration strategy results in lower credit rating while the incremental exploitative strategy improves credit ratings.