Hierarchical organizations often perform poorly in inducing the adoption of innovations. We examine a principal offering contracts to agents who make unobservable effort and adoption-of-innovation choices (yielding moral hazard), who occupy jobs of differing, unobserved productivities (yielding adverse selection), and who engage in a repeated relationship with the principal (causing a ratchet effect to arise). Increasing the rate of adoption of an innovation in such an organization causes the incentive costs of adoption to increase at an increasing rate. Relatively low rates of adoption may then be a response to the prohibitive incentive costs of higher adoption rates

The purpose of this paper is to shed insights into the current inconsistencies of the control-innovation relationship. We draw on the dynamic capabilities literature to hypothesize that diagnostic and interactive control uses are indirectly related to innovativeness through their influence on the perceived formalization of coordination routines. That is, diagnostic and interactive control uses provide an input for an effective coordination process; the information provided allows for the coordination of activities to flourish. Further, we draw on contingency literature to hypothesize that the controls' direct effect on innovativeness depends on the degree of technological turbulence. Using data from a survey of 695 RD it includes a previously un-researched mediating variable (coordination routines), a moderator (technological turbulence), and two types of innovativeness (rate and newness). Second, the study demonstrates why and when diagnostic use is beneficial for innovativeness

This paper shows how competition for land may lead firms to optimally innovate in spite of the market being perfectly competitive. When bidding for a location, firms can enhance their bid by investing in innovations that make the land more valuable. Firms are willing to innovate because the non-replicability of land implies that they will not be undercut by some other producer leading to losses as in the standard theory. In the absence of spillovers over space and over time, firms will optimally innovate. Empirical evidence from U.S. metropolitan areas supports the predictions of the theory

Many emerging markets allow foreign investment as a way to reform domestic markets. Extant studies have found a positive externality on innovation brought forth by foreign direct investment (FDI); however, we know very little about the externality of another form of foreign investment, ownership by foreign institutional investors (FII), on innovation. In this paper, we document one form of FII externality by showing that foreign institutional ownership of the customer firm results in higher supplier innovation. We also show that the FII externality on supplier innovation is stronger when customers have more influence on the suppliers and when the FIIs can facilitate information flow better. Our findings suggest that the real impact of FII can go beyond the underlying firms, and promoting FII may benefit firms, especially smaller firms in emerging countries that do not directly have foreign ownership

Using panel data on top management characteristics and a management quality factor constructed using common factor analysis on individual management quality measures, we analyze the relation between top firm management quality and corporate innovation input and output. We show that top management quality is an important determinant of corporate innovation, with individual aspects of management quality affecting innovation in younger and older firms differently. Further, firms with higher top management quality engage in more risky (“explorative”) innovation strategies. Finally, hiring more and higher-quality inventors is an important channel through which firms with higher management quality achieve greater innovation output

Internal finance leads to a stalemate in innovation games; each firm wants to free-ride on the others’ costly experimentation. When instead innovation is financed externally (e.g., with venture capital or initial public offerings), there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimistic information. I characterize the relative sizes of waves of leaders and followers in innovation cycles, and the endogenous, intertemporal distribution of quality as each wave builds and crashes. Finally, old waves leave an adverse selection “hangover,” such that too much early innovation can cause the market for future innovation to break down

We study the effects of antitrust policy in industries with continual innovation. Antitrust policies that restrict incumbent behavior toward new entrants may have conflicting effects on innovation incentives, raising the profits of new entrants, but lowering those of continuing incumbents. We show that the direction of the net effect can be determined by analyzing shifts in innovation benefit and supply, holding the innovation rate fixed. We apply this framework to analyze several specific antitrust policies. We also show that, in some cases, the tension does not arise, and policies that protect entrants necessarily raise the rate of innovation

How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common ownership leads VCs to hold back projects, withhold funding, and redirect innovation at lagging startups. Effects are stronger where R&D costs are larger, consistent with common owners aiming to cut duplicate costs. Effects are also stronger where technological similarity is greater and preexisting competition is lower, consistent with common owners seeking market power for their surviving projects. Overall, common VC ownership appears to generate social benefits , via improved innovation efficiency, but also social costs

We study the dynamic relation between daily stock returns and daily innovations in optionderived implied volatilities. By simultaneously analyzing innovations in index- and firmlevel implied volatilities, we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon. Our results indicate that the relation between stock returns and innovations in systematic volatility (idiosyncratic volatility) is substantially negative (near zero). These results suggest that asymmetric volatility is primarily attributed to systematic market-wide factors rather than aggregated firm-level effects. We also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stock volatility

We analyze the incentives of investment banks to develop innovative products. We show that client characteristics and market structure affect these incentives significantly. Investment banks with larger market shares have greater incentives to innovate and smaller banks are likely to share their innovations with the largest bank. Innovation incentives increase in volatile environments and regulatory scrutiny actually encourages loophole exploitation activity. Our predictions are consistent with stylized facts and the analysis has broad testable implications for innovative activity in other markets similarly characterized by a lack of comprehensive protection for intellectual property rights, for example, the software industry. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies