Innovation: Asymmetric information and life cycle

Abstract

The objective of this paper is to examine how each stage of the business life cycle affects differences in growth and development, thereby necessitating an exploration of firms' innovation decisions throughout various life-cycle stages and, in turn, their signaling of debt levels. ANOVA has been employed to analyze the dataset comprising 178 observations from CPO companies listed on the Indonesia Stock Exchange (IDX) during the 2018–2023 period. The analysis identified signals of debt levels from firms transitioning from the growth to the mature stage, and from the mature to the decline stage. The existence of asymmetric information incentivizes managers to issue private signals. During the transition from the introduction to the growth stage, firms are more inclined to avoid innovation and instead replicate competitors' products, which results in the absence of debt-level signaling. In the transition from growth to maturity, firms experience cash inflows exceeding outflows, which motivates them to pursue innovation. The inherent risks associated with innovation drive firms to issue securities; thus, they provide debt-level signals as part of financing innovation. Firms in the decline stage tend to engage in drastic innovation and consequently reduce the signaling of debt levels to the market in order to keep innovation-related information private.