Creativity is often presented as a positive activity for organizations, but it is inherently risky. To research conducted by management professors at UC Riverside found that when business leaders discuss creativity and innovation, investors react negatively to the perception of risk, displaying a creativity bias. However, research also shows that this reaction may not be warranted because the talk of creativity is linked to better financial performance of the company. In addition, investor confidence is affected by the tone adopted by business leaders when talking about creativity and innovation. Leaders who talk about creativity in a confident and positive way reassure investors, while creative talk that takes on a more negative tone turns them away.
“Companies like to play on innovation and creativity and most creativity research says that’s a good thing,” said Michel Haselhuhn, associate professor of management at UC Riverside. “But some research suggests otherwise. Creative ideas are inherently risky and people don’t like novelty or uncertainty in leadership. We wanted to see if the creativity bias holds up in the real world where it matters, so we set out to see how investors react to executive discussions about creativity.
Haselhuhn and Elaine Wong, also an associate professor of management at UC Riverside, and Margaret Ormiston at George Washington University, obtained the transcripts of the earnings conference calls made to investors. They used a computer program to analyze transcripts of words related to creativity and innovation, tracking how often those words were mentioned during conference calls. From other sources, they found stock performance data and financial performance data. Next, the researchers ran regressions and robustness checks on the combined datasets and found correlations between creativity, investor confidence and earnings.
They found that companies whose top executives talked more about creativity and innovation had relatively lower stock market returns, indicating lower investor confidence. But the same is not true for corporate profits.
“Surprisingly, and contrary to the creativity bias expressed by investors, companies whose leaders have engaged in creativity actually have higher earnings,” Wong said. “The perception of risk, however, was still enough to deter investors, but only in certain circumstances.”
When leaders talked about creativity with a positive tone and emotions, and communicated confidence and optimism, such as attributing recent positive performance to creativity, the researchers found no negative effect on investor confidence. But when executives spoke of creativity in a more negative tone, for example, suggesting that creativity and innovation were solutions to lagging business performance, investors turned away.
“The tone of the conversation was more important than the industry or the situation. If you mention negative things alongside creativity, you hurt investor confidence,” Ormiston said. “Investors are wary of creativity and innovation, as evidenced by declining stock market returns in response to creative expression. Senior managers should understand this concern and make efforts to minimize it.
The article, “Investors React Negatively to Executives’ Creativity Discussion,” is published in Organizational Behavior and Human Decision Processes and is available here.
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