Placing innovative assets in a separate subsidiary creates more autonomy for the unit manager of the innovation than a division, even when the subsidiary is wholly owned and controlled by the parent. The key driver is limited liability: unlike a division, the parent has the option to walk away from the subsidiary’s debt obligations. As a result, the parent invests less in developing internal uses for the innovation. This causes the unit manager to invest more in developing independent uses for the innovation: he must ”sink or swim” on his own effort, and his desired actions are less subject to overrule. Received June 29, 2012; editorial decision June 8, 2016 by Editor Paolo Fulghieri

This study demonstrates that, apart from managerial agency problem, shareholders' intolerance of failure also deteriorates managerial innovation incentives in public firms. Furthermore, management buyouts improve the innovation intensity, even if managers gain no excess value from the buyouts in collaboration with private equity firms. The study provides insights into the interrelation between firms' innovation, corporate governance, and dividend policy. It presents a rationale behind empirical evidence of a positive relationship between management buyouts and innovation intensity. It provides empirical implications on firms' characteristics that facilitate management buyouts and the return and risk structure of private equity firms

Using a difference-in-differences approach, we study how intellectual property right (IPR) protection affects innovation in China in the years around the privatizations of state-owned enterprises (SOEs). Innovation increases after SOE privatizations, and this increase is larger in cities with strong IPR protection. Our results support theoretical arguments that IPR protection strengthens firms’ incentives to innovate and that private sector firms are more sensitive to IPR protection than SOEs. Received June 17, 2015; editorial decision November 23, 2016 by Editor Andrew Karolyi

We study how relationship lending determines the financing of innovation. Exploiting a negative shock to relationships, we show that it reduces the number of innovative firms, especially those that depend more on relationship lending such as small, opaque firms. This credit supply shock leads to reallocation of inventors whereby young and productive inventors leave small firms and move out of geographical areas where lending relationships are hurt. Overall, our results show that credit markets affect both the level of innovation activity and the distribution of innovative human capital across the economy.Received April 11, 2013; editorial decision May 25, 2016 by Editor Andrew Karolyi

We investigate the development of an innovative and high-risk type of borrowing for local governments, known as structured loans. Using transaction data for more than 2, 700 local governments in France, we show that the adoption of these instruments is more frequent for politicians from highly indebted local governments, from politically contested areas, and during political campaigns. Taking on structured loans helps incumbents win a reelection, and initially allows them to maintain lower taxes. Our findings illustrate how financial innovation can amplify principal-agent problems within the political system

This paper studies strategic industry dynamics of creative destruction in which firms and technologies experience turnover. Theories predict that cannibalization between existing and new products delays incumbents’ innovation, whereas preemptive motives accelerate it. Incumbents’ cost (dis)advantage relative to that of entrants would further reinforce these tendencies. To empirically assess these three forces, I estimate a dynamic oligopoly model using a unique panel data set of hard disk drive manufacturers. The results suggest that despite strong preemptive motives and a substantial cost advantage over entrants, cannibalization makes incumbents reluctant to innovate, which can explain at least 57 percent of the incumbent-entrant innovation gap

Using distinct features of corporate bond exchange-traded funds (ETFs), I find that financial innovation has a significant and long-term positive valuation impact on the systemically important underlying securities. A one standard deviation increase in ETF ownership reduces high-yield and investment-grade bond spreads by 20.3 and 9.2 basis points, respectively, implying an average monthly price increase of 1.03% and 0.75%. Two novel quasi-natural experiments exploit exogenous changes in ETF eligibility to confirm the effect. Examining theoretical explanations for the effect, I find that ETFs decrease liquidity trader participation, increase institutional ownership, and insignificantly or negatively impact the liquidity of individual bonds

During the academic year, 1979-80, over 2,500 students studying first-year economics in nineteen U.K. universities and polytechnics were involved in a research project, the aim of which was to attempt to assess the efficacy of innovative teaching techniques in basic economics. The new techniques included were TIPS (see Allen C. Kelley, 1968), Cases, Programmed Learning, and Macrosimulations. Course packages were constructed, combining innovative and conventional techniques in different proportions. Each course package was designed within the overall objectives of a research design intended to generate a data matrix with sufficient observations in each cell to test the impact of various teaching techniques on different types of students in different institutional settings. Three conventional courses which did not utilize the innovative techniques were included to provide norming data. The common three-hour final examination, which yielded several measures of output, consisted of 20 multiple choice questions to measure knowledge of concepts and simple to intermediate applications, 1 problem-case to measure complex applications and analysis, 1 micro essay and 1 macro essay to measure synthesis and evaluation. There was no choice in the selection of questions to be answered. To ensure that the case and essay marks were consistent across institutions, each paper was regraded by one experienced university lecturer and a sample regraded for a third time to test his consistency. In the three years prior to the experimental year, a total of 26 pilot courses were run in seven institutions to solve logistics problems. Based on the pilot studies, participating institutions adopted one of three broad strategies: (i) the conventional course was scrapped and innovative techniques were substituted for tutorials and essays-complete substitution; (ii) conventional inputs were reduced and innovative techniques were substituted-partial substitution; (iii) innovative techniques were added to existing conventional inputs-add on. Since each teaching technique has a price tag, the strategies produced widely varying course costs, average total cost per student, and marginal cost. An indication of the scope for cost variation can be gained from the fact that the typical conventional first-year course containing 300 students would require 3 lectures and 30 tutorial hours per week (typically there are 10 students per tutorial). In contrast to the use of graduate students in beginning economics tutorials in the United States, tutorials in the United Kingdom are usually shared among all faculty members. A tutorial hour counts as a full contact hour in calculating teaching loads. Thus the opportunity cost of the conventional tutorial system in the United Kingdom could be as high as 7 or 8 upper level courses. Some innovative courses were implemented which scrapped the labor-intensive weekly tutorial system and substituted TIPS, Cases, and one or two hours of class remedial tutorials which students could attend at their own discretion. A comparative institutional cost model was used to derive average and marginal costs. The model included faculty inputs at average U.K. rates, and assumed a 10 hours per week teaching load, and 30 percent of time devoted to research; items such as course as*The Esmee Fairbairn Research Centre, Heriot-Watt University, Edinburgh. Our research was funded by the Department of Education and Science in the U.K., and The Esmee Fairbairn Charitable Trust

This paper explores the potential role of anti-takeover provisions (ATPs) in long-term value creation. Using a change in the legal environment in Delaware as an exogenous event, we document that a subset of firms with a relatively longer term focus (innovative firms) benefit from ATPs. Particularly, these firms experience an increase in Tobin's Q following a state law change in Delaware that increases the effectiveness of ATPs in defending against hostile takeovers. This increase is greater than that for non-innovative firms in Delaware as well as for innovative firms outside Delaware. Furthermore, the innovative firms in Delaware experience a stronger positive market reaction around the state law change dates, relative to other firms. Finally, in a cross-sectional setting we find that innovative firms with above-average takeover protection outperform other firms and are less likely to engage in harmful real earnings management. Taken together, these results provide empirical evidence of potential benefits of ATPs and help explain why such protection continues to be prevalent in the United States

The high-tech sector accounts for the majority of corporate innovation in modern economies. In a sample of 38 countries, we document a strong positive relation between the initial size of the country's high-tech sector and subsequent rates of GDP and total factor productivity growth. We also find a strong positive connection between a country's equity (but not credit) market development and the size of its high-tech sector. Our main difference-in-differences estimates show that better developed stock markets support faster growth of innovative-intensive, high-tech industries. The main channels for this effect are higher rates of productivity and faster growth in the number of new high-tech firms. Credit market development fosters growth in industries that rely on external finance for physical capital accumulation but is unimportant for growth in innovation-intensive industries. These findings show that stock markets and credit markets play important but distinct roles in supporting economic growth. Stock markets are uniquely suited for financing technology-led growth, a particularly important concern for advanced economies