Creative Advantage and Pressure from the Stock Market

To transform creativity into a sustainable competitive advantage, one must invest people, time, and capital into work whose value has not yet been proven. The costs of exploration appear in current profit and loss statements, but it is impossible to determine in advance when or in what form the results will emerge.

This time lag is a difficult issue, especially for publicly traded companies. Companies announce their performance every quarter and are evaluated by the market through their stock price. While this evaluation maintains management discipline, it can also become pressure to judge exploration that has not yet generated revenue using the same metrics as existing businesses. This creates two contexts: the time of the market, which seeks short-term results, and the time required for long-term, uncertain work.

The number of publicly traded companies in the United States peaked at approximately 8,025 in 1996 and declined to about 4,315 by 2023. That is nearly half. However, this figure cannot be read simply as “companies are fleeing the short-term pressure of the stock market.” The decline in the number of listed companies is a combination of fewer new listings, mergers, the exit of companies that no longer meet listing standards, and voluntary delisting. Among delistings, mergers are a major factor, and some research suggests that the ratio of companies voluntarily leaving the market is not large enough to explain the overall decline [1].

Nevertheless, the possibility that the stock market’s time horizon affects corporate investment and innovation has been pointed out in research. Some studies indicate that public companies react less to investment opportunities than private companies, a trend that is particularly strong in industries where stock prices are sensitive to short-term earnings information [2].

There is also analysis suggesting that while the quality of internal innovation declines after an IPO, public companies also begin to incorporate external innovation and acquire new talent [3]. Going public does not unilaterally impair creativity. It expands the possibilities for fundraising and talent acquisition while simultaneously changing how a company uses its time and pursues innovation.

Therefore, the question to ask is not just “public or private.” It is how to support long-term exploration while obtaining capital from the stock market, and what expectations to share with investors. Going private is one option for that.

However, if the owner changes, the time horizon for evaluating the company also changes. Going private does not automatically make long-term investment possible. Who will bear the uncertainty? What kind of results and time frame does that capital seek? Governance that supports creativity must be considered from that perspective.

Sharing two time horizons with investors

What becomes important for a public company in facing the stock market is “expectation management.” However, managing expectations does not mean setting low goals or explaining missed performance by saying, “it’s a long-term investment.” It is about what you are aiming for and what you intend to achieve within what time frame… it is precisely “sharing our company’s context with investors.”

First, it is necessary to convey that the company is trying to balance short-term earnings with long-term exploration. The profits generated by existing businesses are also resources for exploring future opportunities. Short-term earnings are not unnecessary. You explain as a management policy how much you are investing in the ability to create the next value while securing current profits.

If you think of shareholder value as the increment in corporate value from a certain point onward, you cannot consider only the profit of a specific quarter as shareholder value itself. If you cut back on research and development, human resource development, customer understanding, or mechanisms for small experiments to tidy up quarterly figures, you may impair the very power to generate future profits.

Maximizing short-term profit does not always align with maximizing long-term shareholder value. This point must be conveyed not as an abstract philosophy, but by linking it to which capabilities the company is investing in and what it is trying to protect.

Second, explain the balance of investment as an entire portfolio, not just individual projects. Not all exploratory initiatives will succeed. That is precisely why it is important to explain how you combine multiple attempts, where you place resources, and how you make additional investments in things that show potential.

Instead of seeking certain profits from every single item, you manage risk across the entire portfolio and increase future options. You explain that having both businesses that generate short-term revenue and businesses that explore future possibilities leads to the company’s sustainable value.

Showing progress before results emerge

An unavoidable question when explaining long-term exploration is, “Then, how long should we wait?” Here, it is important to separate “the cycle of evaluation and the deadline for results” “the cycle of evaluation and the deadline for results” . Checking progress periodically is not the same as demanding sales or completed businesses every time.

What should be looked at in the early stages of exploration is not just profit. Which hypotheses were tested, what customer behavior was confirmed, what was unknown, and what has become known. You convey this progress of learning to investors according to the stage. If you use the number of ideas or the number of experiments as performance indicators, the goal may end up being just to increase the count. What is important is what the attempt was intended to learn and how the results led to the next decision.

At the same time, show the criteria for allocating capital in stages. What evidence must be obtained to increase investment? When a hypothesis collapses, how do you change direction? If it continues without learning, where do you stop? If there are such decision milestones, long-term investment becomes managed uncertainty rather than “spending that never ends.”

However, what a company can promise investors is not that every individual exploration will succeed. What it can promise is to set clear questions, distribute necessary resources, and decide whether to continue, change, or stop based on the evidence obtained. Talking about long-term possibilities and fulfilling the responsibility of holding capital must be compatible.

IR is the work of designing a company’s time.

Investors are not monolithic. Some prioritize short-term financial returns, while others focus on medium- to long-term business value or social and environmental impact. However, this does not mean that long-term-oriented investors are “gentle” investors who do not seek financial returns. The difference lies in what outcomes they evaluate and on what time horizon. Companies need to clarify their own policies and deepen dialogue with investors whose time horizons and values align with their own.

Furthermore, communication with the stock market is not just about companies unilaterally broadcasting messages. Through investor questions and market reactions, companies can learn which parts of their strategy are understood and which hypotheses lack persuasive power.

Listening to the market is different from changing strategy to match short-term stock prices. It is about learning from dialogue while maintaining the company’s ultimate goals. To achieve this, not only the management team but also the board of directors must take responsibility for long-term exploration.

Investors do not evaluate companies solely based on the words in explanatory materials. They look at actual capital allocation, board agendas, executive compensation, and decisions made when performance temporarily dips. If a company claims to be pursuing long-term exploration but cuts exploration budgets every time short-term performance worsens, its actions send a stronger message than its words.

Communication with the stock market is not a public relations activity to be left solely to the IR department. It is a part of governance where the company shares with investors the time horizon on which it creates value, how it accepts uncertainty, and what capital it requires to do so. Companies that leverage a creative advantage must not only attract creative people but also establish mechanisms that direct capital toward long-term potential.

The fact that some companies choose to go private can be understood as a reaction to this mismatch in time horizons. However, what is necessary for a creative advantage is not necessarily leaving the stock market. It is about simultaneously maintaining the power to generate current earnings and the power to explore future value, and sharing expectations and criteria with the providers of capital who support both. If a company and the stock market are operating on different time scales, creating a structure that connects the two is what is required of the governance of publicly listed companies.

References

[1] Craig Doidge, G. Andrew Karolyi, and René M. Stulz, “Are There Too Few Publicly Listed Firms in the US?”, Financial Review, 2025.

[2] John Asker, Joan Farre-Mensa, and Alexander Ljungqvist, “Corporate Investment and Stock Market Listing: A Puzzle?”, The Review of Financial Studies, 28(2), 2015, pp. 342–390.

[3] Shai Bernstein, “Does Going Public Affect Innovation?”, The Journal of Finance, 70(4), 2015, pp. 1365–1403.