We introduce and test a firm-level innovation-efficiency measure new to the finance literature. The measure, termed the research quotient (RQ), defined as the firm-specific output elasticity of research and development (R&D), was first developed in the management literature. RQ has a low correlation with existing innovation input, output, and efficiency measures. We test RQ in a number of innovation tests common to the finance literature and find that RQ is robust in all tests of firm value, even after controlling for previous innovation measures. The results suggest that RQ may serve as a relevant complementary measure of a company’s innovation

This paper presents evidence that labor-saving technologies positively impact a firm's financial leverage. The results are robust with two different measures of labor-saving innovations: automation and process innovations. The effects are more pronounced in firms facing greater labor input rigidity, such as firms with higher labor intensity, share of minimum wage workers, and union coverage. Our analysis suggests that labor-saving innovations reduce wage rigidity, allowing firms to increase financial leverage

We find strong evidence that firms with employee-friendly workplaces achieve greater innovative success, particularly in industries where innovation is more difficult to achieve. Furthermore, employee-friendly firms were also more inclined to sustain R&D investment during the recent crisis. These findings are consistent with the view that an employee-friendly workplace helps to develop tolerance for failure, which encourages engagement in innovation. We find no support for alternative explanations, such as employee-friendly workplaces helping to attract and retain talented employees and reducing career concerns of executives, which could nurture innovation

Jonathan Skinner of Dartmouth University reviews “Why Not Better and Cheaper? Healthcare and Innovation” by James B. Rebitzer and Robert S. Rebitzer. The Econlit abstract of this book begins: “Considers why the US health-care system is becoming neither better nor more affordable over time, contending that the health sector generates the wrong kinds of innovation by making it easy to profit from low-value innovations and difficult to do the same from innovations that reduce care costs

We study how biases in financial reporting affect managers' incentives to develop innovative projects and to make appropriate investment decisions. Conservative reporting practices impose stricter verification standards for recognizing good news, and reduce the chance that risky innovations will lead to favorable future earnings reports. Holding all else constant, more conservative reporting therefore weakens the manager's incentive to work on innovative ideas, consistent with informal arguments in the extant literature. However, all else does not stay constant because the manager's pay plan will change in response to changes in the accounting system. We show that under optimal contracting, more conservative accounting does not stifle innovation in organizations, but rather increases incentives for innovation, as long as conservatism reduces the risk of an overstatement

We show that wrongful discharge laws—laws that protect employees against unjust dismissal—spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of holdup, these laws enhance employees' innovative efforts and encourage firms to invest in risky but potentially mould-breaking projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across U.S. states

We show that wrongful discharge laws—laws that protect employees against unjust dismissal—spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of holdup, these laws enhance employees'innovative efforts and encourage firms to invest in risky but potentially mould-breaking projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across U.S. states

Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the trade-off via two instruments: a cash prize and a follow-on contract. It primarily uses the latter, by favouring the innovator at the implementation stage when the value of the innovation is above a certain threshold and handicapping the innovator when the value of the innovation is below that threshold. A cash prize is employed as a supplementary incentive only when the value of innovation is sufficiently high. These features are consistent with current practices in the procurement of innovation and the management of unsolicited proposals

We examine the effect of foreign institutional investors on firm innovation. Using firm-level data across 26 non-U.S. economies between 2000 and 2010, we show that foreign institutional ownership has a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which foreign institutions affect firm innovation: Foreign institutions act as active monitors, provide insurance for firm managers against innovation failures, and promote knowledge spillovers from high-innovation economies. Our article sheds new light on the real effects of foreign institutions on firm innovation

We hypothesize that political activism is valuable because it helps reduce political uncertainty, which, in turn, fosters firm innovation. We find that firms that support more politicians, winning politicians, politicians on congressional committees with jurisdictional authority over the firms’ industries, and politicians who join those committees innovate more. We employ a natural experiment to show a causal effect of political activism on innovation. We also show evidence of intra-industry and geographical political activism spillovers