Text-Based Technological Risk and Firm Innovation: An Empirical Analysis

While innovation is a critical driver of firm success, firms face a variety of risks during the innovation. Technological risk, in particular, poses a significant challenge to innovation, as the rapid pace of technological change can make it challenging for firms to keep up with evolving consumer demands and preferences. Despite its importance, the impact of technological risk on firm innovation performance is rarely discussed due to the lack of a direct measure of firm-level ex-ante technological risk. To fill this gap, we first construct a novel measure of technological risk using risk disclosures in 10-K reports by text mining techniques. Specifically, we propose a hierarchical framework that incorporates distant learning and sentiment analysis techniques to identify and quantify technological risk. This new measure offers valuable insights into a firm’s awareness and perception of technological risk exposure, as well as the types of technologies involved. Using 10-K reports, USPTO patent data, and Compustat datasets from fiscal years 2005 to 2014, we examine the effect of technological risk on future innovation performance, as measured by patent counts and average patent citations. Our empirical results show that firms exposed to technological risk are more likely to improve their innovation performance, as evidenced by increased patenting activities and higher average patent citations. In addition, we find that firms operating in highly competitive environments adopt more proactive innovation strategies to mitigate technological risk, while firms with a narrow technological knowledge base tend to prioritize the development of high-quality patents. Results are robust to alternative measures of innovation performance. Our study contributes to the emerging stream of IS research on investigating firm-related risk factors, such as data breach risk, security risk, IT project risk, and so forth. Our findings have important implications for scholars and policymakers interested in corporate risk management and innovation strategy development.