Finance and Innovation: The Case of Publicly Traded Firms

We hypothesize that established firms with innovative projects and technologies will make relatively greater use of arm's length financing (such as public debt and equity); whereas less innovative firms will tend to use relationship based borrowing (such as bank borrowing). The hypothesis is developed using a simple model in which firms with more innovative projects give greater discretion to managers by relying on arm's length financing. When a firm has less innovative projects that are easier for a relationship lender to evaluate, the manager is given less discretion and bank borrowing is more prevalent. Using a large panel of US companies from 1974-2000, we find that consistent with our predictions, firms that rely more on arm's length financing receive a larger number of patents and these patents are more significant in terms of influencing subsequent patents. The economic magnitude of the results is large: a one standard deviation increase in the arm's length financing variables of a typical innovating firm is associated with a substantial increase in its innovative output which, in turn,leads to more than 6%increase in its future value. We confirm our results by demonstrating that firms that issue public debt for the first time and firms that issue equity through an SEO exhibit a significant increase in innovative activity two years after the issue. Our results are robust to conditioning on financial constraints faced by the firm, firm size, R&D expenditure, market to book, firm maturity, unobserved time-invariant firm characteristics, the choice of a firm's decision to go to the public debt market and a variety of model specifications and variable definitions.http://deepblue.lib.umich.edu/bitstream/2027.42/39169/1/970.pd

Essays in corporate finance.

This dissertation provides theoretical explanation and empirical evidence of how corporate governance and capital structure affect different corporate stakeholders. The first essay looks at the threat of hostile takeovers and innovation. Using a panel of 14,675 firms over the 1976-2000 period, it shows that firms incorporated in states that enact antitakeover laws innovate less than firms in states that do not enact these laws. The second essay examines how capital structure is related to innovation. It demonstrates that firms that rely more on arm's length financing such as equity and public debt receive a larger number of patents, and these patents are more significant in terms of influencing subsequent patents. The third essay investigates how the legal protection of investors and labor interact with firm capital and ownership structure to shape corporate restructuring decisions in poorly performing firms. It finds that firms with poor operating performance are more likely to undertake large scale layoffs and top management turnover when investor protection is stronger. Major asset sales are more common when investor protection is very weak and very strong: Asset sales tend to be value-destroying (value enhancing) in weak (strong) investor protection countries. Strong collective relations (labor union) laws seem to be effective in preventing layoffs and asset sales, but only in countries with good investor protection. When investor protection is weak, strong union laws are associated with less management turnover and more asset sales, suggesting collusion between management and workers.Ph.D.Commerce-BusinessFinanceSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/125954/2/3224813.pd

Labor and Corporate Governance: International Evidence from Restructuring Decisions

Our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance. We find that strong union laws protect not only workers but also underperforming managers. Weak investor protection combined with strong union laws are conducive to worker-management alliances, wherein poorly performing firms sell assets to prevent large-scale layoffs, garnering worker support to retain management. Asset sales in weak investor protection countries lead to further deteriorating performance, whereas in strong investor protection countries they improve performance and lead to more layoffs. Strong union laws are less effective in preventing layoffs when financial leverage is high. Copyright (c) 2009 The American Finance Association.