Knowledge that Transforms

We study the role of bilateral political relations in explaining variations in the equity portfolio allocation of foreign institutional investors. Using a large sample at the fund–firm–year level, we find that political distance between countries leads to significant retrenchment of foreign institutional investors from local firms. Consistent with our theorized mechanisms, we find that the effect is stronger for stocks that are more exposed to geopolitical risk, dividend-paying, and less liquid, as foreign investors sell off local securities perceived to become riskier to hold. Overall, our findings identify a novel financial channel through which geopolitical risk affects international equity markets.

To address climate change, an increasing number of firms have declared net zero commitments. In this article, we theoretically and empirically demonstrate that a firm's net zero commitment may present a double-edged sword on its cost of equity. By modelling a firm's optimal transition pathway, we theoretically elucidate the relationship between transition ambition, transition readiness, and enterprise value. By estimating the carbon risk premium for 1100 listed firms that had declared net zero commitments globally by 2022, we empirically show that such commitments can either increase or decrease a firm's carbon risk premium, depending on its transition readiness. Specifically, among firms with the same greenhouse gas emissions intensity, those with lower transition readiness may experience a higher cost of equity from declaring net zero commitments. These results align with our theoretical analysis and cannot be explained solely by values investors' green preferences nor the discounted transition credibility of high-emitting firms. Additionally, we show that institutional investors effectively channel carbon risk into the stock market by divesting from high-emitting firms that have declared net zero commitments. Our findings have important implications: firms whose transition readiness do not measure up to their transition ambition may paradoxically expose themselves to greater transition risk and, consequently, a higher cost of equity. To alleviate the accumulation of carbon risk premium in the stock market, policymakers should support the transition readiness of firms in their jurisdictions. This involves building transition capacity, raising transition urgency, and lowering investors' discount rates.

We show that acquisitions of private targets increase the quantity, quality, and value of the acquiring firms’ patents more than acquisitions of public targets. Private-target acquisitions also foster significantly greater innovation synergies, increase the total number of inventors, and promote new collaborations among inventors. These outcomes are associated with the acquirers’ expertise in identifying innovative private targets, are more pronounced in industries with breakthrough technologies, and are not driven by targets with existing patent portfolios. We also find that the patenting increases explain away the higher announcement returns for private versus public-target acquisitions. Overall, our results underscore the role of complementary innovation capabilities in driving value creation through the integration of private targets with publicly listed acquirers.

We examine how competition affects the economic returns firms derive from their patented innovations. Using a stock market-based measure that reflects the discounted cash flows of newly granted patents, we document a robust negative relationship between competition intensity and the economic value of patents. To establish causality, we implement a quasi-experimental design and consider horizontal M&A as events that are likely to reduce competition for non-merging industry peers. Leveraging the random timing of peers’ patent grant dates within a narrow window around M&A announcements, we show that patents granted immediately after such events on average experience a 2.8% increase in value. This effect is stronger for deals that are more likely to be anti-competitive, but is absent for non-horizontal mergers that are unlikely to alter competition intensity. Overall, we offer new insights into the competition-innovation relationship by showing that competition weakens the economic returns that incentivize firm innovation.