Participation in Setting Technology Standards and the Implied Cost of Equity

This paper empirically investigates the financial market’s reaction to firms’ participation in developing technology standards which is coordinated by Standard Setting Organizations (SSOs). We present the first evidence on the influence of SSO membership over a firm’s implied cost of equity capital - the discount rate applied by investors to its expected future cash flows. Our analysis utilizes a panel of 3,350 U.S. public firms and their memberships in 183 SSOs operating in Information and Communications Technologies (ICT) fields between 1996 and 2014. We find that SSO membership results in a statistically significant reduction in the cost of equity using exogenous variations from SSO closures and instrumental variables. This negative correlation is more pronounced for a firm’s first SSO membership, among members of the most influential SSOs as well as in ICT industries and certain technology domains. We empirically document the contingent role of three mechanisms – innovation intensity, market uncertainty and information environment – through which SSO membership can affect financial outcomes