Creativity is usually framed as something that is positive for organizations to engage in. Research from UC Riverside suggests it is far from risk free, however, and, indeed, investors can often react negatively to any talk of creativity and innovation from company leaders.

It perhaps goes without saying that this apparent bias is unwarranted and that creativity and innovation are typically linked with a higher financial performance from the company. The bias can be overcome, however, if the leaders talk about creativity and innovation in a confident and positive manner rather than adopting a more negative tone.

“Companies love to play up innovation and creativity and most research on creativity says it’s a good thing,” the researchers say. “But there is some research that suggests the opposite. Creative ideas are inherently risky and people don’t like novelty or uncertainty in leaders. We wanted to see if the creativity bias holds in the real world where it matters so we looked to see how investors respond to executives’ discussions of creativity.”

Responding to creativity

The researchers trawled through the transcripts of the conference calls leaders made to investors, with a computer program used to analyze each transcript for any words relating to innovation or creativity. The program monitored both how often these words were mentioned on the course and also the tone of each mention. The researchers then gathered financial and stock data to understand how the company performed in and around the conference call period.

The researchers then performed various robustness and regression checks on the data to try and identify any links between talk of creativity and innovation and both earnings and investor confidence. This process revealed that the executives who discussed innovation and creativity appeared to achieve lower stock returns, suggesting that investors had lower confidence in them, even though this didn’t have any negative effect on company earnings.

“Surprisingly, and in contrast to the creativity bias expressed by investors, firms with leaders that engaged in creativity-speak actually had higher earnings,” the researchers explain. “The perception of risk, however, was still enough to deter investors, but only in certain circumstances.”

The risk was dissipated when leaders spoke in a more positive way about innovation and creativity, such that they were crediting it for any recent positive performances. This mitigated any negative response from investors.

“The tone of conversation was more important than the industry or situation. If you mention negative things alongside creativity you’ll hurt investor confidence,” the authors conclude. “Investors are wary of creativity and innovation as evidenced by lowered stock returns in response to creative expression. Top executives need to understand this concern and make efforts to minimize it.”