Prior research suggests that executive option grants that do not quickly vest provide managers with better incentives to pursue long-term, instead of short-term, objectives. Previous research also suggests that the pursuit of long-term objectives could be undermined by the risk of early termination. We conjecture that these arguments jointly suggest that managers are better motivated to pursue innovation when they are given more incentive compensation with longer vesting periods for unexercised options and yet some protection from disruptive takeover threats. Our evidence for a sample of newly public firms is consistent with more innovative firms jointly choosing such a combination

Based on a sample of venture capital (VC)-backed IPO firms, we examine whether tolerance for failure spurs corporate innovation. We develop a novel measure of VC investors' failure tolerance by examining their willingness to continue investing in underperforming ventures. We find that IPO firms backed by more failure-tolerant VC investors are significantly more innovative and VC failure tolerance is particularly important for ventures that are subject to high failure risk. We show that these results are not driven by endogenous matching between failure-tolerant VC firms and start-ups with high ex ante innovative potential. We also examine the determinants of the cross-sectional heterogeneity in a VC firm's failure tolerance. We find that both capital constraints and career concerns can negatively distort a VC firm's failure tolerance. Less experienced VC firms are more exposed to these distortions, making them less failure tolerant than are more established VC firms. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press

The Schumpeterian opportunity cost hypothesis predicts that firms concentrate innovative activities in recessions. However, empirical evidence suggests that innovative activities are procyclical. Theory proposes that firms shift R&D investments and innovation from recessions to booms to maximize returns by capturing high-demand periods before imitators compete away rents. This paper provides the first empirical test of these predictions. Results indicate that R&D spending is more procyclical in industries with faster obsolescence, where matching invention to demand is more valuable, and innovation is more procyclical in industries with weaker IP protection, where imitation poses a greater threat

We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation. This topic is of interest because innovation is crucial for firm‐ and national‐level competitiveness and stock liquidity can be altered by financial market regulations. Using a difference‐in‐differences approach that relies on the exogenous variation in liquidity generated by regulatory changes, we find that an increase in liquidity causes a reduction in future innovation. We identify two possible mechanisms through which liquidity impedes innovation: increased exposure to hostile takeovers and higher presence of institutional investors who do not actively gather information or monitor

We find a negative relationship between bank distress and the level, quality and trajectory of firm-level innovation during the Great Depression, particularly for R&D firms operating in capital intensive industries. However, we also show that because a sufficient number of R&D intensive firms were located in counties with lower levels of bank distress, or were operating in less capital intensive industries, the negative effects were mitigated in aggregate. Although Depression era bank distress was associated with the stifling of innovation, our results also help to explain why technological development was still robust following one of the largest shocks in the history of the U.S. banking system

This paper attempts to shed some light on the role of financial sector policies in generating new knowledge, drawing on the experience of one of the fastest growing and largest developing countries. Using time series data for India over the period 1963–2005, the results indicate that interest rate restraints help generate ideas. Other financial repressionist policies, in the form of high reserve and liquidity requirements, as well as significant directed credit controls, appear to have a dampening effect on ideas production. These results lend some support to the argument that some form of financial sector reforms may help stimulate economic growth via increasing technological innovation

We model the impact of public and private ownership structures on firms' incentives to invest in innovative projects. We show that it is optimal to go public when exploiting existing ideas and optimal to go private when exploring new ideas. This result derives from the fact that private firms are less transparent to outside investors than are public firms. In private firms, insiders can time the market by choosing an early exit strategy if they receive bad news. This option makes insiders more tolerant of failures and thus more inclined to invest in innovative projects. In contrast, the prices of publicly traded securities react quickly to good news, providing insiders with incentives to choose conventional projects and cash in early

We model the impact of public and private ownership structures on firms' incentives to invest in innovative projects. We show that it is optimal to go public when exploiting existing ideas and optimal to go private when exploring new ideas. This result derives from the fact that private firms are less transparent to outside investors than are public firms. In private firms, insiders can time the market by choosing an early exit strategy if they receive bad news. This option makes insiders more tolerant of failures and thus more inclined to invest in innovative projects. In contrast, the prices of publicly traded securities react quickly to good news, providing insiders with incentives to choose conventional projects and cash in early

This paper asks whether the rapid innovation in Central Processing Units (CPU) results in inefficient elimination of basic Personal Computer (PC) configurations. I estimate a model in which PC makers choose first which CPU options to offer with their products, and then set prices. I contribute to the literature by analyzing a game in which firms make multiple discrete product choices. This requires relaxing point-identifying assumptions, allowing for a large product space, and tackling sample selection problems. I find that the demand for PCs is highly segmented. Using the estimated model in counterfactual analysis, I find that Intel’s introduction of its Pentium M chip contributed significantly to the growth of the mobile segment of the PC market, and to total consumer surplus, while crowding out older technologies. The scope for inefficient product elimination appears to be very limited: the upper bound on the welfare loss appears modest, while the lower bound suggests no welfare loss. I also find that the lion’s share of the short-run effect of innovation is enjoyed by the 20 % least price-sensitive consumers. Important questions regarding complementarities in innovative activities and their associated long-term benefits are left for future research. ∗ I am indebted to my advisors, Steven Berry and Philip Haile, for their continued advice and encouragement. I am also especially grateful to Donald Andrews for his advice. I have benefited greatly from discussions with Eduardo Faingold, Joshua Lustig, fellow graduate students at Yale, and numerous seminar participants. All errors are mine. I am grateful to IDC and to Mr. Steven Clough for making data available. Financial support from the Carl Arvid Anderson Prize Fellowship of the Cowles Foundation is gratefully acknowledged

The mobile applications (apps) industry has exhibited rapid entry and growth in the midst of a recession. Using unique data from the iPhone application ecosystem, we examine how the development of 'killer apps' (apps appearing in the top grossing rank) varies by market and app characteristics. We find that previous app experience and no updating increase the likelihood of becoming a killer game app, while more updates increase the likelihood of becoming a non-game killer app. Development opportunities, level of competition, and demand preferences are possible drivers of the opposing innovation process results in game and non-game markets