In this study, we examine the impact of class action litigation shocks on corporate innovation. Our experimental design is based on an unanticipated court ruling that reduces the risk of shareholder class action lawsuits for firms located within the jurisdiction of the US Ninth Circuit. Innovation output by firms headquartered in this area increased significantly after this decision compared with that of firms elsewhere. This result is consistent with our trading hypothesis, which states that the threat of litigation leads to managerial myopia. The increase in innovation is more pronounced at high-tech firms and firms operating in a competitive environment. Other measures of ex ante litigation risk indicate that firms with the greatest litigation risk experience the greatest increase in innovation after this decision. We conclude that a reduction in the threat of class action litigation leads firms to increase innovation

This paper provides evidence of local innovation spillovers (i.e., innovation by one firm fostering innovation by neighboring firms). First, I document that exogenous shocks to innovation by listed firms affect innovation by private firms in the same geographical area and that such local innovation spillovers decline rapidly with distance. Second, these local innovation spillovers stem from knowledge diffusing locally through two channels: learning across local firms and inventors moving from their employer to both existing firms and newly started spin-outs. Finally, I study the two-way relations between innovation spillovers and the availability of capital. I find that local innovation spillovers cause venture capital funds from outside the area to invest more in the local area, and that capital availability amplifies local innovation spillovers

We examine whether and how national culture influences corporate innovation using a newly available comprehensive database on innovation around the world. After controlling for the impacts of formal institutions, and firm-level and country-level variables, we find that culture has relevance for innovation: The probability of a firm innovating is higher in individualistic, indulgent, and long-term oriented societies, as well as in cultures with less power distance, less uncertainty avoidance, and less masculine cultures. In the innovative firms subsample, we continue to find the same significant impact of culture on firms' innovation performance/quality. Our results are robust to endogeneity concerns, different model specifications, alternative measures of innovation and culture, and different subsample analyses

We investigate the effect of stock market liberalization on technological innovation. Using a sample of 20 economies that experience stock market liberalization, we find that these economies exhibit a higher level of innovation output after liberalization and that this effect is disproportionately stronger in more innovative industries. The relaxation of financial constraints, enhanced risk sharing between domestic and foreign investors, and improved corporate governance are three plausible channels that allow stock market liberalization to promote innovation. Finally, we show that technological innovation is a mechanism through which stock market liberalization affects productivity growth and therefore economic growth. Our paper provides new insights into the real effects of stock market liberalization on productivity growth and the economy

Procuring an innovation involves motivating a research effort to generate a new idea and then implementing that idea efficiently. If research efforts are unverifiable and implementation costs are private information, a trade-off arises between the two objectives. The optimal mechanism resolves the trade-off via two instruments: a cash prize and a follow-on contract. It primarily uses the latter, by favouring the innovator at the implementation stage when the value of the innovation is above a certain threshold and handicapping the innovator when the value of the innovation is below that threshold. A cash prize is employed as a supplementary incentive only when the value of innovation is sufficiently high. These features are consistent with current practices in the procurement of innovation and the management of unsolicited proposals

We develop a theory of innovation waves, investor sentiment, and merger activity based on Knightian uncertainty. Uncertainty-averse investors are more optimistic on an innovation when they can make contemporaneous investments in multiple uncertain projects. Innovation waves occur when there is a critical mass of innovative companies, and are characterized by stronger investor sentiment, higher equity valuation, and hot initial public offering markets. Our approach to investor sentiment is not based on erroneous beliefs disjoint from economic fundamentals, but depends on uncertainty on the fundamentals. Our model can explain sector-specific booms uncorrelated with aggregate economic activity and the overall stock market

Despite a longstanding debate over the pros and cons of imposing legal liability on directors and officers (D&Os), there is limited evidence on how D&O liability affects corporate innovation. We study this question by exploiting Nevada's 2001 corporate law change that dramatically lowered D&O legal liability and helped Nevada become the second most popular state for out-of-state incorporations. We find that firms incorporated in Nevada exhibit an increase in innovation outputs relative to matched control firms after the law change, particularly firms facing higher litigation risk or operating in more innovative industries. The results are driven mainly by exchange-listed firms that are subject to better governance than over-the-counter (OTC) listed firms. Lower D&O liability also enables firms to pursue more risky, but potentially more rewarding, explorative innovation. Therefore, although holding D&Os liable may be desirable overall, it also entails a cost by discouraging innovation in some firms. Our study has implications for how the litigation environment may influence sustainable growth via innovation

Using CEOs' early-life experience during China's Cultural Revolution (1966–1976) to distinguish the trust level of CEOs, we employ a difference-in-differences identification strategy to show that the CEO's trust level exhibits significantly positive impacts on corporate innovation. We then use an alternative dataset from the survey of the Chinese Enterprise Survey System in 2000 to measure the trust at the firm level and subsequently achieve highly consistent findings. We further demonstrate that the substitution effect between informal and formal institutions also exists in relation to the impact of trust on innovation. Trust plays a more important role in promoting innovation when formal institutions are lacking. Overall, this study enriches our understanding on the effects of the CEO's trust level on corporate innovation and provides a micro-level evaluation of China's Cultural Revolution in the long run

Using a large sample of firms from 30 countries, we find that the integration of corporate social responsibility (CSR) criteria into executive compensation is associated with greater innovation output in countries around the world. We also find that this positive association is stronger in countries with weak stakeholder orientation, countries with weak legal environments, and countries without mandatory CSR reporting requirements. These findings suggest that CSR contracting can compensate for institutional voids and high stakeholder demand for CSR, and thereby foster firm innovation. The results of the channel analyses suggest that a greater level of employee innovation productivity, enhanced managerial risk-taking, and greater responsiveness of firms' R&D investment to their investment opportunities play a significant role in the association between CSR contracting and innovation. Overall, our study demonstrates in a global context the importance of linking executive compensation to nonfinancial criteria in addition to financial criteria, and it documents the heterogeneity in the effect of CSR contracting on firm innovation in different countries

We predict that entrepreneurs are more likely to have a long-term orientation to their decision making if they have male heirs, because traditionally sons, not daughters, have been expected to carry on the family business. Our results support this prediction. Specifically, we find that when entrepreneurs have at least one son, have more sons, and have a firstborn son, their firms are more innovative. The results are robust to a battery of robustness tests, including alternative measures of innovation, instrumental variable approach, and Heckman two-step correction for selection bias. Our further analyses show that the positive association between male heirs and firm innovation is stronger for entrepreneurs with a greater son preference and is weaker for entrepreneurs who more impacted by the one-child policy