Essays on Innovation in Corporate Finance

Abstract

This dissertation studies innovation within the context of corporate finance across three papers. The second section of this dissertation establishes empirical facts about how a firm’s equity ownership status affects firms’ innovation strategies. These empirical facts are compared to equilibria predicted by extant innovation theories. Public firms have greater research intensity as compared to private firms, and public firms invest more in all types of innovation. This suggests that firms that are more innovative opt into public status in order to gain access to less costly financing. Additionally, private equity held firms are still as innovative as other private firms but skew their innovative efforts towards development and away from research. In the third section, the intersection of policy and innovation within corporate finance is explored. Firms’ innovative inputs and outputs are examined following the passage of the America Invents Act (AIA). The AIA changed the United States’ patent system from first-to-invent to a first-to-file. Post-AIA, small firms reduced R&D expenditures, R&D employment, and the percent of R&D devoted to new business/product lines. Whereas, large firms increased their investments in innovation, which translated into increased innovative outputs as compared to small firms. Overall, these results provide causal evidence that the patent system change reduced innovative activities at small firms. Lastly, the fourth section investigates market concentration through the lens of patenting. A dynamic industry classification network was created based on patent abstract text from firms’ patents. This dynamic patent network better explains firm-level financial characteristics versus NAICS or SIC codes when updated annually. Using this patenting network, the concentration in R&D expenditures is found to be increasing in recent years. This increase in R&D concentration is undetected using NAICS or SIC codes. Further, the dynamic patent classification system has a distinct advantage over existing text-based systems since it is applicable to both public and private firms which engage in patenting. Thereby this dissertation examines how firm-level innovation is affected by financing source(s), legislation, and industry concentration, which provides a broad view of innovation at both public and private firms within the broader field of corporate finance.