Patent Value and Citations: Creative Destruction or Strategic Disruption?

Prior work suggests that more valuable patents are cited more and this view has become standard in the empirical innovation literature. Using an NPE-derived dataset with patent-specific revenues we find that the relationship of citations to value in fact forms an inverted-U, with fewer citations at the high end of value than in the middle. Since the value of patents is concentrated in those at the high end, this is a challenge to both the empirical literature and the intuition behind it. We attempt to explain this relationship with a simple model of innovation, allowing for both productive and strategic patents. We find evidence of greater use of strategic patents where it would be most expected: among corporations, in fields of rapid development, in more recent patents and where divisional and continuation applications are employed. These findings have important implications for our basic understanding of growth, innovation, and intellectual property policy

The Deleveraging of U.S. Firms and Institutional Investors’ Role

Corporate leverage has decreased markedly in the U.S. since 1992. In contrast to press coverage of hedge funds increasing debt, increases in institutional investments, primarily by mutual funds, account for part of this deleveraging. We use implied mutual fund trades constructed from individual-investor flows as exogenous variation in institutional ownership for estimation. Supporting the hypothesis institutions contributed to deleveraging, our estimates increase significantly after regulatory reforms incentivized stronger institutional governance. Firms deleverage by reducing debt and transitioning to debt associated with enhanced monitoring and efficiency. Counterfactual simulations indicate aggregate leverage would have been eight percentage points higher without institutions' influence

The Deleveraging of U.S. Firms and Institutional Investors’ Role

Corporate leverage has decreased markedly in the U.S. since 1992. In contrast to press coverage of hedge funds increasing debt, increases in institutional investments, primarily by mutual funds, account for part of this deleveraging. We use implied mutual fund trades constructed from individual-investor flows as exogenous variation in institutional ownership for estimation. Supporting the hypothesis institutions contributed to deleveraging, our estimates increase significantly after regulatory reforms incentivized stronger institutional governance. Firms deleverage by reducing debt and transitioning to debt associated with enhanced monitoring and efficiency. Counterfactual simulations indicate aggregate leverage would have been eight percentage points higher without institutions' influence

Social forces in corporate finance

My essays focus on the interactions between different levels of economic analysis by exploring the interplay between widespread social forces and firm outcomes. Because social forces, which are a type of economic force, encompass the importance of group relationships, there are many potentially significant social forces both internal and external to the firm that may contribute to its\u27 operational competitiveness. In the first essay, A Corporate Culture Channel: How Increased Shareholder Governance Reduces Firm Value, I examine corporate culture, a prominent internal social force. I show corporate culture is an important channel through which shareholder governance affects firm value. I develop a novel data set to measure aspects of corporate culture and use a regression discontinuity strategy to demonstrate stronger shareholder governance significantly changes aspects of culture. I find greater results-orientation but less customer-focus, integrity, and collaboration. Consistent with a positive link between governance and value, shareholders initially realize financial gains: increases in sales, profitability, and payout occur. However, over time, I find intangible assets associated with customer satisfaction and employee integrity deteriorate, which partly reverses the gains from greater results-orientation. These findings are consistent with a model of multitasking where stronger governance incentivizes managers to concentrate on easy-to-observe benchmarks at the expense of the harder-to-measure intangibles, even though such actions are not in the firm\u27s best long-term interest. On average, I find firm value declines 1.4% through this corporate culture channel. I use an instrumental variable design and interventions by activist hedge funds to test the external validity of the inferences. Across these complementary research designs, I consistently find strong support for the economic importance of a corporate culture channel. In the second essay, Dividend Payments as a Response to Peer Influence, I examine peer influence, a prominent external social force. I show peer firms play an important role in determining the timing and magnitude of U.S. corporate dividends. In particular, dividend changes by peer firms accelerate the time to a dividend change by 132 days. Peer firm dividend changes lead to increases in dividend payments of 15% – an effect that is larger than many previously identified dividend determinants. At the industry level, peer effects alter dividend yields; if expected yields are 3%, peer effects inflate (deflate) yields to 3.4% (2.6%). Cross-sectional heterogeneity suggests elements of strategic behavior and behavioral biases are producing the estimated peer effects. Excess-variance, instrumental variable and partial identification strategies are used to address the difficult challenge of establishing peer effects, and because each strategy uses different identifying assumptions, the conclusions are not fragile to any single identifying assumption

Social forces in corporate finance

My essays focus on the interactions between different levels of economic analysis by exploring the interplay between widespread social forces and firm outcomes. Because social forces, which are a type of economic force, encompass the importance of group relationships, there are many potentially significant social forces both internal and external to the firm that may contribute to its\u27 operational competitiveness. In the first essay, A Corporate Culture Channel: How Increased Shareholder Governance Reduces Firm Value, I examine corporate culture, a prominent internal social force. I show corporate culture is an important channel through which shareholder governance affects firm value. I develop a novel data set to measure aspects of corporate culture and use a regression discontinuity strategy to demonstrate stronger shareholder governance significantly changes aspects of culture. I find greater results-orientation but less customer-focus, integrity, and collaboration. Consistent with a positive link between governance and value, shareholders initially realize financial gains: increases in sales, profitability, and payout occur. However, over time, I find intangible assets associated with customer satisfaction and employee integrity deteriorate, which partly reverses the gains from greater results-orientation. These findings are consistent with a model of multitasking where stronger governance incentivizes managers to concentrate on easy-to-observe benchmarks at the expense of the harder-to-measure intangibles, even though such actions are not in the firm\u27s best long-term interest. On average, I find firm value declines 1.4% through this corporate culture channel. I use an instrumental variable design and interventions by activist hedge funds to test the external validity of the inferences. Across these complementary research designs, I consistently find strong support for the economic importance of a corporate culture channel. In the second essay, Dividend Payments as a Response to Peer Influence, I examine peer influence, a prominent external social force. I show peer firms play an important role in determining the timing and magnitude of U.S. corporate dividends. In particular, dividend changes by peer firms accelerate the time to a dividend change by 132 days. Peer firm dividend changes lead to increases in dividend payments of 15% – an effect that is larger than many previously identified dividend determinants. At the industry level, peer effects alter dividend yields; if expected yields are 3%, peer effects inflate (deflate) yields to 3.4% (2.6%). Cross-sectional heterogeneity suggests elements of strategic behavior and behavioral biases are producing the estimated peer effects. Excess-variance, instrumental variable and partial identification strategies are used to address the difficult challenge of establishing peer effects, and because each strategy uses different identifying assumptions, the conclusions are not fragile to any single identifying assumption

Patent Value and Citations: Creative Destruction or Strategic Disruption?

Prior work suggests that more valuable patents are cited more and this view has become standard in the empirical innovation literature. Using an NPE-derived dataset with patent-specific revenues we find that the relationship of citations to value in fact forms an inverted-U, with fewer citations at the high end of value than in the middle. Since the value of patents is concentrated in those at the high end, this is a challenge to both the empirical literature and the intuition behind it. We attempt to explain this relationship with a simple model of innovation, allowing for both productive and strategic patents. We find evidence of greater use of strategic patents where it would be most expected: among corporations, in fields of rapid development, in more recent patents and where divisional and continuation applications are employed. These findings have important implications for our basic understanding of growth, innovation, and intellectual property policy