The Sasin Research Seminar series continues this week with a fascinating talk by Sasin’s Ph.D. Student Ms. Nattarinee Denlertchaikul. The lecture examined firm performance and how it is affected by text-based corporate innovation and periods of economic policy uncertainty. The talk began by establishing the growing awareness of the importance of innovation in business, as evidenced by the considerable rise in Research and Development budgets. Next, Ms. Denlertchaikul looked at the increase of Economic Policy Uncertainty (EPU) over the last couple of decades, driven by factors such as the US election, Brexit, trade wars, and sanctions. This led to the two research questions. The first asks – is innovation beneficial to the firm? If it is, then does the positive effect of corporate innovation on firm performance remain when under the influence of economic policy uncertainty? The research contributes to the literature in several ways. It is the first to investigate the impact of corporate innovation on firm performance under EPU. Furthermore, it highlights the importance of the operating environment in which the firm operates. In addition, novel text-based innovation, developed by Bellstam, was used as a proxy for corporate innovation. Most of the previous research on the topic had found a positive link between innovation and firm performance. However, there were a couple that noted negative results due to risk, uncertainty, and volatility. The majority of studies simply look at the link between innovation and firm performance, ignoring external policies and situations. However, this research has inserted EPU into the equation as a largely unanticipated and exogenous financial shock to see the effects on performance. When EPU is high, a firm’s performance may be affected in different ways, and this is what the study wants to find out. For example, performance may drop, as firms will find it harder to raise capital. This is because when EPU is high, the default risk for firms that rely on risky innovation will rise. In addition, as their loan collateral is intangible, lenders will demand a higher loan spread. Conversely, the strategic growth option means uncertainty increases the potential gain, as innovation might provide competitive advantages. The equation used for the calculations was then explained, along with the three variables used in the model – dependent, independent, and control variables. This was followed by a look at the data used, which included board characteristics, firm characteristics, innovation and EPU, and a final sample of 2720 observations from 431 firms between 1996 and 2010. Ms. Denlertchaikul then explained that text-based innovation was used instead of traditional innovation proxy as it captures a broader range of activities, including patent and non-patent activities. It is a better way to measure the quality and quantity of corporate innovation. The construction of the text-based innovation index was then discussed. The results of the research were then examined and explained. The findings imply that the positive effect of corporate innovation is reduced as EPU increases. So, in times of greater uncertainty, the favorable effect of corporate innovation on firm value is substantially reduced. The robustness checks were shown, including various instrumental-variable analyses, and all confirmed the results. The talk ended with a look at the implications for stakeholders that resulted from the study. Three main groups were identified. For the management of companies that engage in high levels of corporate innovation, it is essential to consider EPU when deciding innovation expenditure. Similarly, shareholders must be aware of the operating environment when investing. Policymakers should also be trying to minimize uncertainty, if possible, and create an environment more conducive for innovative firms to thrive.