End-of-day stock price manipulation is generally associated with short-termism, long-term damage to equity values, and reduced incentives for employees to innovate. We use a sample of suspected stock price manipulation events based on intraday data for stocks from nine countries over eight years and find evidence of negative effects of market manipulation on innovation. We show that these negative effects are particularly harmful to innovation in markets with low intellectual property rights and high shareholder protection

This paper presents new evidence on the relationship between competition and innovation by extending previous literature from manufacturing to financial services. We introduce a new measure of overall innovation by estimating and enveloping annual minimum cost frontiers to create a global frontier. The distance to the global frontier constitutes each bank’s technology gap, which decreases if the bank manages to innovate. Our innovation measure enables us to derive and estimate the model of Aghion et al. (2005b) at the firm level for the US banking industry. Based on individual bank Call Report data for the period 1984–2004, consistent with theoretical and empirical work by Aghion et al., we find evidence of an inverted-U relationship between competition and innovation that is robust over several different specifications. Further evidence on major structural changes in the US banking industry indicates that banks moved beyond their optimal innovation level and that interstate banking deregulation resulted in lower bank innovation. Policy implications to financial reform and prudential regulation are discussed also

This paper examines the impact of changes in job security on corporate innovation in 20 non-U.S. OECD countries. Using a difference-in-differences approach, we provide firm-level evidence that the enhancement of labor protection has a negative impact on innovation. We then discuss possible channels and find that employee-friendly labor reforms induce inventor shirking and a distortion in labor flow. Further investigation reveals that the negative relation is more pronounced in (1) firms that heavily rely on external financing, (2) firms that have high R&D intensity, (3) manufacturing industries, and (4) civil-law countries. Our micro-level evidence indicates that enhanced employment protection impedes corporate innovation

Based on data from 32 countries over the period 1996–2010, this paper is the first to assess the relationship between financial innovation, on the one hand, and bank growth and fragility, as well as economic growth, on the other hand. We find that different measures of financial innovation, capturing both a broad concept and specific innovations, are associated with faster bank growth, but also higher bank fragility and worse bank performance during the recent crisis. These effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks. In spite of these seemingly ambiguous findings, our evidence points to a positive net effect of financial innovation on economic growth: financial innovation is associated with higher growth in countries and industries with better growth opportunities

We analyze the change in firms’ innovation behavior (short-term adjustment and long-term strategy) in reaction to the credit supply shock to banks in the recent financial crisis 2008/2009. Using a matched bank-firm data set for Germany, we utilize the exogenous variation caused by the interbank market disruptions on credit supply in instrumental variable estimations. Concerning the short-term innovation adjustment in 2009, our results show that (i) current innovation activities, (ii) the initiation of additional innovation and (iii) the reallocation of unused labor resources to the innovation department are affected by the shock to bank financing. We find that the effect is more pronounced for product innovation than for process innovation. Investigating the impact on the long-term innovation strategy in reaction to the crisis, we find that (iv) the sensitivity to adopting any innovation-related strategy to cope with the crisis could not be attributed to the negative bank credit supply shock

We examine the impact of government economic policy uncertainty (GEPU) on corporate innovation and identify a cost-of-capital transmission channel. We find that GEPU increases firms’ cost of capital, which translates into lower innovation. As economic policy uncertainty rises, firms with more exposure to such uncertainty face a higher weighted average cost of capital and innovate less. Innovations of financially constrained firms and firms relying on external finance in a competitive environment are affected more. Our study provides novel evidence that higher economic policy uncertainty hinders innovation not only through the traditional investment irreversibility channel, but also through the cost-of-capital channel

We investigate the relationship between internal governance and firms' innovation. We hypothesize that internal governance stemming from the difference in expected employment horizons between a CEO and her subordinate executives improves a firm's innovation. Using the age difference between a CEO and her subordinate executives as the primary measure of internal governance, we find a strong positive relationship between internal governance and firms' innovation output, and scientific and economic values. We show that the positive relation is causal and robust based on empirical tests including exogenous variation in internal governance resulting from non-forced CEO turnovers. We further show that the relationship between internal governance and innovation is more pronounced when external governance is weaker and when subordinate executives are expected to have more influence on the board. Cross-sectional analysis shows that internal governance spurs innovation in younger firms, firms led by generalist CEOs, and when the likelihood of insider successions is higher

We examine the role of inventor CEOs—those with personal hands-on experience of innovation—in the financing of innovation. Using a sample of technology initial public offerings (IPOs) in the US, we document that inventor CEOs are associated with lower underpricing at the time of the IPOs. Inventor CEOs also appear more capable of taking their firms public during “cold” IPO market periods when financing conditions are more difficult. Analyses based on regulatory changes and a founder-only sample suggest that these relationships are causal. Further, inventor-led firms appear to invest the IPO proceeds more productively, as reflected in the firms’ superior innovation outcomes in the post-IPO period. The stock market fails to fully understand these relationships, and IPOs led by inventor CEOs produce large positive abnormal returns in the three years following the offering. Our findings are consistent with inventor CEOs facilitating innovation financing for startup firms by effectively reducing information asymmetry and valuation uncertainty of firm's innovation capital for outside investors

We analyze the effect of a firm's innovation activities on its likelihood to be acquired and the takeover premium using a large sample of M&A transactions. We show that firms with larger innovation outputs and R&D investments are more likely to be acquired, receive unsolicited bids, and receive multiple bids. The takeover premium increases with the target firm's innovation output, and this positive relation is stronger when there are more competing bidders, when acquiring firms’ product markets are competitive, and when technological proximity is lower in the acquiring firms’ industry. Both the acquirer's cumulative abnormal return around the announcement date and post-acquisition operating performance are positively related to the target firm's innovation output and R&D spending

We study how capital account liberalization affects technological innovation. We provide robust evidence that industries more dependent on external finance have disproportionately higher innovation performance in economies with a more liberalized capital account. Among the components of capital account liberalization, although both equity market liberalization and outward FDI by domestic firms have sizable effects on innovation, they affect it differently. While equity market liberalization helps alleviate financial constraints by facilitating access to external finance, outward FDI by domestic firms promotes innovative activities by increasing internal finance from foreign operations. Further analysis indicates that the innovation-enhancing effects of capital account liberalization are limited mainly to countries with relatively well-developed financial systems and strong institutional quality, even in periods of financial crisis