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  5. Financing Innovation
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Financing Innovation

Paper Session

Monday, Jan. 4, 2021 12:15 PM - 2:15 PM (EST)

Hosted By: American Finance Association
  • Chair: Song Ma, Yale University

Kill Zone

Sai Krishna Kamepalli
,
University of Chicago
Raghuram G. Rajan
,
University of Chicago
Luigi Zingales
,
University of Chicago

Abstract

We study why high-priced acquisitions of entrants by an incumbent do not necessarily stimulate more innovation and entry in an industry (like that of digital platforms) where customers face switching costs and enjoy network externalities. The prospect of an acquisition by the incumbent platform undermines early adoption by customers, reducing prospective payoffs to new entrants. This creates a “kill zone” in the start-up space, as described by venture capitalists, where new ventures are not worth funding. Evidence from changes in investment in startups by venture capitalists after major acquisitions by Facebook and Google suggests this is more than a mere theoretical possibility.

The ESG-Innovation Disconnect

Lauren Cohen
,
Harvard University
Umit Gurun
,
University of Texas-Dallas
Quoc Nguyen
,
DePaul University

Abstract

No firm or sector of the global economy is untouched by innovation. In equilibrium, innovators will flock to (and innovation will occur where) the returns to innovative capital are the highest. In this paper, we document a strong empirical pattern in green patent production. Specifically, we find that oil, gas, and energy-producing firms - firms with lower Environmental, Social, and Governance (ESG) scores, and who are often explicitly excluded from ESG funds’ investment universe – are key innovators in the United States’ green patent landscape. These energy producers produce more, and significantly higher quality, green innovation. Our findings raise important questions as to whether the current exclusions of many ESG-focused policies – along with the increasing incidence of explicit divestiture campaigns - are optimal, or whether reward-based incentives would lead to more efficient innovative outcomes.

Product Innovation and Credit Market Disruptions

Joao Granja
,
University of Chicago
Sara Moreira
,
Northwestern University

Abstract

We combine micro-level product barcode data for the consumer goods industry obtained from Nielsen with the Community Reinvestment Act (CRA) and Dealscan lending datasets to provide new evidence that credit market disruptions significantly affected the rate, novelty, and performance of product innovation during the recent financial crisis. We find that credit market disruptions did not affect the rate of introduction of new products on firms’ existing product lines but limited their expansion to new product lines. Moreover, products created by firms experiencing credit market disruptions contain fewer novel product characteristics. Consistent with a credit frictions channel, these effects are concentrated in firms that are smaller, younger, and more dependent of external sources of finance. Our estimates further indicate that products introduced in new categories by credit-constrained firms during the financial crisis generate less revenues than products introduced in new categories by the same firm during normal times. Overall, our findings suggest that disrupted credit markets disrupt radical product innovation.
Discussant(s)
Will Gornall
,
University of British Columbia
John Van Reenen
,
Massachusetts Institute of Technology
Michael Ewens
,
California Institute of Technology
JEL Classifications
  • G3 - Corporate Finance and Governance