Essays on Finance and Corporate Innovation

No abstract available

Innovation shapes corporate life. Companies innovate in order to keep their competitive advantage on the market. Over the long run, if companies do not innovate, they lose their position on the market and may even go bankrupt if their peers continue to innovate. Corporate innovation affects many companies’ decisions – from the choice of corporate innovation strategy itself to the firms' interaction with their peers and banks. My dissertation aims to stress the importance of innovation in corporate life by showing the impact of innovation on firm boundaries, corporate disclosure policy, and lending. In the first chapter, I study how firms’ choices of M&A, licensing, collaboration, and their performance depend on the extent of their innovation linkages. I find that innovation matters for firm boundaries. Companies integrate more tightly with peers with closer follow-on innovation. Based on patent citations, I construct a measure capturing what firms are the innovation originators and what firms are the followers, which I call innovation proximity. I find that companies are more likely to acquire peers with closer follow-on innovation rather than to create strategic alliances with them or license/buy their patents. My measure of innovation proximity does not affect firms’ combined announcement returns but only the way they are split. In M&A transactions with the target with closer follow-on innovation, the bidder pays a lower premium and exhibits greater announcement returns. On the other hand, in licensing and strategic alliance deals with patent holder with closer follow-on innovation, the patent seeker obtains lower returns. These results are consistent with the hold-up theory where companies bargain over type and terms of the contract. In the second chapter, I focus on corporate nondisclosure and firm value. The evidences are based on the confidential treatment (CT) of corporate information. CT can exacerbate information asymmetry and agency problems but may also protect trade secrets; therefore whether it is valuable for shareholders is an empirical question. I address this question using novel, hand-collected data, studying the market reaction to CT requests. I document that companies with strong governance experience positive or no market reaction to redacted filings, whereas firms with weak governance obtain negative returns. I also examine whether and what types of information redaction might have negative effect on the market. Companies mostly redact information in collaboration, supply, license, and asset purchase agreements. Vis-à-vis fully disclosed filings, the market responds positively to redacted product-related information and negatively to redacted investor-sensitive information, such as settlement agreements. Taken together, this evidence is consistent with the various channels through which CT may affect firm value. The third chapter presents a joint work with Alberto Manconi and Ekaterina Neretina. We analyze the use and valuation of patents as collateral in syndicated loans to large, publicly listed U.S. firms. We provide novel stylized facts about the use and valuation of collateralized patents. Firms that pledge patents are larger than the typical Compustat firm, but smaller than other syndicated loan borrowers; they obtain smaller loans, and pledge their less valuable patents; lenders that accept patent collateral tend to be larger and have bigger market shares. The use of patents as collateral could reflect an expansion of the set of pledgeable assets, suggesting a relaxation of financial constraints; but the opacity of intangible collateral such as patents may also create room for lenders to extract rents from borrowers, lending a smaller amount per dollar value of collateral. Preliminary evidence supports the latter view.