Is financial innovation necessary for sustaining economic growth? To address this question, we build a Schumpeterian model in which entrepreneurs earn profits by inventing better goods and profit-maximizing financiers arise to screen entrepreneurs. The model has two novel features. First, financiers engage in the costly but potentially profitable process of innovation: they can invent better methods for screening entrepreneurs. Second, every screening process becomes less effective as technology advances. The model predicts that technological innovation and economic growth eventually stop unless financiers innovate. Empirical evidence is consistent with this dynamic, synergistic model of financial and technological innovation

In this study, we examine the impact of class action litigation shocks on corporate innovation. Our experimental design is based on an unanticipated court ruling that reduces the risk of shareholder class action lawsuits for firms located within the jurisdiction of the US Ninth Circuit. Innovation output by firms headquartered in this area increased significantly after this decision compared with that of firms elsewhere. This result is consistent with our trading hypothesis, which states that the threat of litigation leads to managerial myopia. The increase in innovation is more pronounced at high-tech firms and firms operating in a competitive environment. Other measures of ex ante litigation risk indicate that firms with the greatest litigation risk experience the greatest increase in innovation after this decision. We conclude that a reduction in the threat of class action litigation leads firms to increase innovation

Glaeser and Lang (2024; GL) reviews the accounting literature on innovation, which has increased substantially in recent years. GL makes an important contribution to accounting research by bringing into the literature the implications of Romer's Nobel Prize winning endogenous growth theory and by explaining how accounting research addresses questions related to innovation. We contribute to accounting research by building on GL's foundation to suggest three main paths forward for future innovation research. First, focus on innovation's three defining attributes: novelty, nonrivalry, and partial excludability. Second, determine the needs of various users of information about a firm's innovation activities and how to meet those needs; we focus on the needs of investors. Third, address questions our discussion highlights as potentially important for future research on financial reporting and innovation, including the crucial question of an innovation's identifiability

This paper investigates how competition for scarce corporate resources impacts innovation incentives within multidivisional firms and, consequently, shapes firms’ preferences for fostering or restricting intra-firm competition. In our model, divisions become privately informed about the potential value of new investment opportunities generated through their innovation initiatives. We demonstrate that intra-firm competition unambiguously reduces divisions’ ex ante innovation incentives. However, it benefits ex post resource allocation by enabling the firm to (i) select the most promising project and (ii) limit the rents divisions earn from their private information. Consequently, a firm’s preference to limit or encourage interdivisional competition hinges on balancing ex post allocative efficiency, which favors increased intra-firm competition, against ex ante innovation incentives, which favor reduced competition. Our analysis identifies plausible conditions under which each organizational design—competitive or exclusive innovation—emerges as the optimal choice

We examine how metric intensity—that is, the quantity, frequency, and extent to which performance metrics are tracked and used—varies with a firm's dependency on innovation for business success. Although performance metrics are essential in an organization's management control system, little is known about how the use of metrics differs in organizations with varying dependencies on incremental and radical innovation. Drawing on data from a sample of small‐ and medium‐sized enterprises (SMEs), we hypothesize and find that firms' dependency on incremental (radical) innovation is positively (negatively) associated with metric intensity. Furthermore, we find that (1) the positive relationship between the dependency on incremental innovation and metric intensity is stronger when the organizational culture is focused more on “control” and (2) the negative relationship between the dependency on radical innovation and metric intensity is mitigated when the organizational culture is focused more on “flexibility.” Additional analysis shows that the positive (negative) relationship between incremental (radical) innovation dependency and metric intensity can be mitigated by greater use of metrics for decision‐facilitating purposes. Our findings suggest that metrics‐based formal controls are designed to match the types of innovation dependencies and pre‐existing informal controls such as organizational culture. This study highlights the importance of distinguishing different types of innovation dependency in studying management control systems

The article shows that innovations are induced, since they become more profitable with the expansion of output. The amount of resources devoted to innovating activity, however, is in general not the optimal one because of the pressure of two opposing forces. On the one hand, competition between potential innovators tends to make this amount too large, on the other, the inability of innovators to capture all the benefits tends to make the amount too small. When all benefits are captured by the innovator either there is no economic growth due to innovations or else innovators are the sole beneficiaries from that growth. When benefits are diffused the innovation will always lead to economic growth, but only by sheer coincidence will it lead to maximum growth, which may be missed because the innovation is introduced either too early or too late. The rate of growth is always positive if the innovation is introduced too late. It may fall to zero with too-early introduction or even become negative if innovational activity is subsidized

While innovation matters for competitiveness, it may expose firms to survival risks. Using plant-product data for Chile and discretetime hazard models, we show that innovating plants have a lower hazard of exit. However, risk has a strong impact on the innovation-exit relationship: only innovators that retain diversified sources of revenue or face lower market risk are less likely to die. Single-product innovators are at greater risk of exiting. Exposure to technical risk does not affect exit probabilities differentially. We provide tentative evidence that singleproduct innovators have higher profits, which helps to rationalize their innovation decision despite the increased risk of exit

We develop a real options model in which an entrepreneur facing ambiguity makes optimal investment and financing decisions for an innovation project. We introduce jumps in innovation returns and model investors’ aversion to ambiguity in both diffusion and jump risks. Debt accelerates investment by lowering the threshold and shortening expected waiting time, thereby increasing project value. This effect strengthens under greater ambiguity, offering a novel rationale for why debt—not equity—fosters innovation. Our results provide a coherent explanation for recent empirical findings on debt’s role in innovation and contribute to the broader literature on investment under uncertainty

In this article, we use cross-state panel and cross-U.S. commuting-zone data to look at the relationship between innovation, top income inequality and social mobility. We find positive correlations between measures of innovation and top income inequality. We also show that the correlations between innovation and broad measures of inequality are not significant. Next, using instrumental variable analysis, we argue that these correlations at least partly reflect a causality from innovation to top income shares. Finally, we show that innovation, particularly by new entrants, is positively associated with social mobility, but less so in local areas with more intense lobbying activities

Innovating firms pay more bribes than noninnovators across 25,000 firms in 57 countries. The difference is larger in countries with more bureaucratic regulation and weaker governance. Innovators that pay bribes do not receive better services and do not have greater propensity to engage in other illegal activities such as tax evasion. Thus, innovators are more likely to be victims of corruption than perpetrators. Our findings point to the challenges facing entrepreneurs in developing countries and are consistent with the view that rent seeking by government officials unlike private criminal activity is more likely to target innovators