Essays on Finance and Innovation

In this dissertation I examine the topic of the economics of innovation, focusing on the impact of a firm's innovative activity on its financial decisions and performance outcomes and on other market participants including its competitors, suppliers and customers./nIn the first chapter, "The Dark Side of Patents: Effects of Strategic Patenting of Firms and Their Peers", I provides evidence that firms can benefit from patents of low productive value by focusing on the main purpose of patents: capturing market share and defending the monopolistic profits of the firm by deterring entry in the same product market. I introduce the new way of defining such "strategic" patents, of high private value to the firm but low technological contribution, by combining data on stock market-based measure of economic value of patents and a citation-based measure of patent technological knowledge spillover. Using data on patent applications, I find that strategic patenting by firms indeed leads to an increase in market concentration. Additionally, strategic patents have a smaller but still positive effect on the total factor productivity of firms, while having a significant positive effect on profit growth. For the closest competitors, I observe a reduction in total factor productivity and innovative output as well in both profit and sales growth following strategic patenting, signaling an absence of the positive technological spillover to the other firms operating within the same product market that would be characteristic for technological patents. Finally, I find that strategic patents force competitors change their innovative strategy to be able to continue to compete in the product market by shifting from exploration to exploitation of firm's existing patent technological knowledge and redirecting it into the new market area./nWhile the first chapter focuses on the impact that a firm's patent application has on the competitive environment, the second chapter, "Patent-Induced Shock Propagation Through the Supply Chain", examines the spillover effect of a firm's innovative activity through its production network. This paper sheds light on how innovation by the focal firm affects the firms it is related to via the firm's customers, and what it in turn tells us about the type and purpose of this innovative activity, its effectiveness, and the overall market structure. By identifying firm idiosyncratic shocks with a firm's patent application, I find that affected suppliers impose positive output and profitability spillovers on their consumers, which in turn translates into significant revenue increase of other firm's customers' suppliers. The observed effects are especially pronounced for patents exhibiting high economic value./nIn the third chapter, "R\&D Tax Credits, Innovation Search Strategy, and Unintended Outcomes" (with Lee Fleming, Benjamin Balsmeier, and Joel Stiebale), we observe that while R\&D tax credits appear to increase R\&D expenditures and total patenting, it remains less clear how they change innovative search strategies, influence the types of inventions that result, and ultimately shape industrial and competitive dynamics. We develop a simple model that predicts a stronger focus on the exploitation of previously known technologies, due to the need to generate short-term profit in order to take advantage of the credit. Matched estimations from the Californian tax credit of 1988 support these predictions. We then explore the competitive impact of such credits on treated firms and find increased valuation, blocking and strategic patenting, and markups, as well as decreased new market entry. Using stock market reactions, we also illustrate positive externalities for distant competitors in the technology space and negative externalities for proximal competitors. Subsequent introductions of R&D tax credits in other states illustrate qualitatively similar, though quantitatively smaller, effects. While tax credits appear to benefit recipients, they may also contribute to declining economic dynamism.

Advisor: Sraer, David