Mar: New draft of “Rapidly Evolving Technologies and Startup Exits”
We study the diffusion of techniques designed to identify causal relationships in corporate finance research. We estimate the diffusion started in the mid-nineties, lags twenty years compared to economics, and is now used in the majority of corporate finance articles. Consistent with recent theories of technology diffusion, the adoption varies across researchers based on individuals’ expected net benefits of adoption. Younger scholars, holders of PhDs in economics, and those working at top institutions adopt faster. Adoption is accelerated through networks of colleagues and alumni and is also facilitated by straddlers who cross-over from economics to finance. Our findings highlight new forces that explain the diffusion of innovation and shape the norms of academic research.
This paper examines how startups’ exit choices are related to their positioning within technological cycles. We construct novel measures of startups’ technology positioning based on patent text, and we find that startups innovating in rapidly evolving technology areas (i.e., early in the technology cycle) are more likely to exit via IPO. In contrast, those innovating in stable areas (i.e., later in the cycle) are more likely to sell-out. We argue that innovation in rapidly evolving areas substitutes existing technologies and creates a path to an independent market presence favoring IPO exits, whereas innovation in stable areas fosters technological complementarity which induces sell-outs. A battery of tests support this interpretation and indicate that technological characteristics play an important role in explaining startups’ exit avenues.
Numerous works have examined the finance-related implications of intellectual property that is generated internally or acquired through M&A activity. The transfer of intellectual property via the secondary market for patents has received less attention. This paper fills that gap by asking how patent acquisitions interact with firm investment policy. I find that patent acquirers subsequently invest in more R&D, increase internal patenting, and eventually make new investments in CAPX. Firms with more technological expertise and investment opportunities acquire more patents. Patent sales are the dominant type of contract and maximize investment incentives; patent licenses frequently contain royalties, which induce underinvestment problems. Nevertheless, licensing can be explained in part by financial and strategic considerations. Licensing is more likely when buyers become financially constrained, when revenue can be shifted to low tax sellers, and when the buyer is a competitor acquiring rights to a valuable patent. Overall, these results suggest patent acquisitions are motivated by the pursuit of investment synergies, rather than innovation substitution, commercialization motives, or legal threats.
Following SOX, exchanges mandated majority independent boards and defined independence such that some directors could reclassify from non-independent to independent. Because membership is unchanged, reclassifications make a board more independent legally, but not economically. I exploit the plausibly exogenous nature of reclassification eligibility to compare “treatment” firms that altered board membership to similar “placebo” firms that reclassified directors instead. Consistent with the view that boards are chosen optimally, placebo firms outperformed treatment firms by 3.7%. Furthermore, the mandate, which reduced firm specific knowledge as inside directors departed, also impacted investment choices: Treatment firms subsequently shifted away from intangible investments.
Works in Progress
“VC Firm Investment Choices” (with Laurent Fresard, Gerard Hoberg, and Berk Sensoy)
“Contracting for patents”