Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-15T06:39:18.472Z Has data issue: false hasContentIssue false
  • English
  • Français

Innovation Strategy of Private Firms

Published online by Cambridge University Press:  28 December 2017

Huasheng Gao ,
Po-Hsuan Hsu  and
Kai Li
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We compare innovation strategies of public and private firms based on a large sample over the period 1997–2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 1 , February 2018 , pp. 1 - 32
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1

We are grateful for helpful comments from an anonymous referee, Andres Almazan, Julian Atanassov, Jan Bena, Thomas Chemmanur, Guoli Chen, Bill Kerr, Tomislav Ladika, Alexander Ljunqgvist, Paul Malatesta (the editor), Gustavo Manso, Ron Masulis, Hernan Ortiz-Molina, Neslihan Ozkan, Ivan Png, Jay Ritter, Morten Sorensen, Xuan Tian, Cheng-Wei Wu, Ting Xu, Yu Yuan, Alminas Žaldokas, seminar participants at Boston University, Harvard Business School, Nanyang Technological University, National Chengchi University, Shanghai Advanced Institute of Finance, Shanghai University of Finance and Economics, University of Bristol, University of British Columbia, University of Exeter, University of Hong Kong, University of International Business and Economics, University of Oklahoma, and conference participants at the 2013 Conference on the Theories and Practices of Securities and Financial Markets, the 2014 Financial Management Association Asia Pacific Conference, the 2014 International Conference on Corporate Finance and Financial Markets, and the 2014 China International Conference in Finance. We acknowledge the effort of our research assistants Rita Lei Chen, Yi Du, Cherry Guo, Jialing Hu, Yunan Liu, and Chi-Yang Tsou. Hsu acknowledges the support from the General Research Fund sponsored by the Research Grants Council in Hong Kong (Ref. 17500015). Li acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC Grant Number: 435-2013-0023). All errors are our own.

References

Acharya, V. V., and Xu, Z.. “Financial Dependence and Innovation: The Case of Public versus Private Firms.” Journal of Financial Economics, 124 (2017), 223–243.CrossRefGoogle Scholar
Aggarwal, V. A., and Hsu, D. H.. “Entrepreneurial Exits and Innovation.” Management Science, 60 (2014), 867–887.CrossRefGoogle Scholar
Aghion, P.; Angeletos, G.-M.; Banerjee, A.; and Manova, K.. “Volatility and Growth: Credit Constraints and the Composition of Investment.” Journal of Monetary Economics, 57 (2010), 246–265.Google Scholar
Aghion, P.; Bond, S.; Klemm, A.; and Marinescu, I.. “Technology and Financial Structure: Are Innovative Firms Different?” Journal of the European Economic Association, 2 (2004), 277–288.CrossRefGoogle Scholar
Aghion, P.; Van Reenen, J.; and Zingales, L.. “Innovation and Institutional Ownership.” American Economic Review, 103 (2013), 277–304.CrossRefGoogle Scholar
Angrist, J.“Estimation of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice.” Journal of Business & Economic Statistics, 19 (2001), 2–16.CrossRefGoogle Scholar
Angrist, J., and Krueger, A.. “Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments.” Journal of Economic Perspectives, 15 (2001), 69–85.CrossRefGoogle Scholar
Asker, J.; Farre-Mensa, J.; and Ljungqvist, A.. “Corporate Investment and Stock Market Listing: A Puzzle?” Review of Financial Studies, 28 (2015), 342–390.Google Scholar
Atanassov, J.; Nanda, V.; and Seru, A.. “Finance and Innovation: The Case of Publicly Traded Firms.” Working Paper, University of Oregon (2007).CrossRefGoogle Scholar
Balsmeier, B.; Fleming, L.; and Manso, G.. “Independent Boards and Innovation.” Journal of Financial Economics, 123 (2017), 536–557.Google Scholar
Barrot, J.-N.“Investor Horizon and the Life Cycle of Innovative Firms: Evidence from Venture Capital.” Management Science, 63 (2017), 3021–3043.CrossRefGoogle Scholar
Benner, M. J., and Tushman, M.. “Process Management and Technological Innovation: A Longitudinal Study of the Photography and Paint Industries.” Administrative Science Quarterly, 47 (2002), 676–706.Google Scholar
Bereskin, F.; Hsu, P.-H.; and Rotenberg, W.. “The Real Effects of Real Earnings Management: Evidence from Innovation.” Contemporary Accounting Research, forthcoming (2017).CrossRefGoogle Scholar
Bernstein, S.“Does Going Public Affect Innovation?” Journal of Finance, 70 (2015), 1365–1403.Google Scholar
Bharath, S. T., and Dittmar, A. K.. “Why Do Firms Use Private Equity to Opt Out of Public Markets?” Review of Financial Studies, 23 (2010), 1771–1818.Google Scholar
Bhattacharya, S., and Ritter, J. R.. “Innovation and Communication: Signaling with Partial Disclosure.” Review of Economic Studies, 50 (1983), 331–346.CrossRefGoogle Scholar
Bloom, N.; Schankerman, M.; and Van Reenen, J.. “Identifying Technology Spillovers and Product Market Rivalry.” Econometrica, 81 (2013), 1347–1393.Google Scholar
Bolton, P; Scheinkman, J.; and Xiong, W.. “Executive Compensation in Speculative Markets.” Review of Economics Studies, 73 (2006), 577–610.CrossRefGoogle Scholar
Brav, O.“Access to Capital, Capital Structure, and the Funding of the Firm.” Journal of Finance, 64 (2009), 263–308.CrossRefGoogle Scholar
Brown, J.; Ivkovic, Z.; Smith, P.; and Weisbenner, S.. “Neighbors Matter: Causal Community Effects and Stock Market Participation.” Journal of Finance, 63 (2008), 1509–1531.CrossRefGoogle Scholar
Bushee, B. J.“The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Bushee, B. J.“Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?” Contemporary Accounting Research, 18 (2001), 207–246.Google Scholar
Chemmanur, T. J.; He, S.; and Nandy, D. K.. “The Going-Public Decision and the Product Market.” Review of Financial Studies, 23 (2010), 1855–1908.Google Scholar
Cirillo, B.; Brusoni, S.; and Valentini, G.. “The Rejuvenation of Inventors through Corporate Spinouts.” Organization Science, 25 (2013), 1764–1784.CrossRefGoogle Scholar
Cockburn, I.; Henderson, R. M.; and Stern, S.. “Untangling the Origins of Competitive Advantage.” Strategic Management Journal, 21 (2000), 1123–1145.3.0.CO;2-R>CrossRefGoogle Scholar
Cohen, W. M., and Levinthal, D. A.. “Fortune Favors the Prepared Firm.” Management Science, 40 (1994), 227–251.Google Scholar
Cohen, W. M.; Levin, R. C.; and Mowery, D. C.. “Firm Size and R&D Intensity: A Re-Examination.” Journal of Industrial Economics, 35 (1987), 543–565.CrossRefGoogle Scholar
Coval, J., and Moskowitz, T.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 1–39.CrossRefGoogle Scholar
Cremers, M.; Nair, V.; and John, K.. “Takeovers and the Cross-Section of Returns.” Review of Financial Studies, 22 (2009), 1409–1445.CrossRefGoogle Scholar
Economist. “Out of the Ivory Tower.” Economist, 314(Feb. 3, 1990), 75–76.Google Scholar
Edmans, A.; Fang, V. W.; and Lewellen, K. A.. “Equity Vesting and Investment.” Review of Financial Studies, 30 (2017), 2229–2271.CrossRefGoogle Scholar
Faccio, M.; Marchica, M.-T.; and Mura, R.. “Large Shareholder Diversification and Corporate Risk-Taking.” Review of Financial Studies, 24 (2011), 3601–3641.Google Scholar
Fama, E., and French, K.. “Industry Costs of Capital.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Fang, V. W.; Tian, X.; and Tice, S.. “Does Stock Liquidity Enhance or Impede Firm Innovation?” Journal of Finance, 69 (2014), 2085–2125.CrossRefGoogle Scholar
Ferreira, D.; Manso, G.; and Silva, A. C.. “Incentives to Innovate and the Decision to Go Public or Private.” Review of Financial Studies, 27 (2014), 256–300.CrossRefGoogle Scholar
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623–639.Google Scholar
Gao, H.; Harford, J.; and Li, K.. “CEO Turnover–Performance Sensitivity in Private Firms.” Journal of Financial and Quantitative Analysis, 52 (2017), 583–611.Google Scholar
Gao, H., and Li, K.. “A Comparison of CEO Pay–Performance Sensitivity in Privately-Held and Public Firms.” Journal of Corporate Finance, 35 (2015), 370–388.CrossRefGoogle Scholar
Gopalan, R.; Milbourn, T.; Song, F.; and Thakor, A.. “Duration of Executive Compensation.” Journal of Finance, 69 (2014), 2777–2817.Google Scholar
Graham, J. R.; Harvey, C. R.; and Rajgopal, S.. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics, 40 (2005), 3–73.Google Scholar
Hall, B. H.; Jaffe, A. B.; and Trajtenberg, M.. “The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools.” In Patents, Citations and Innovations: A Window on the Knowledge Economy, Jaffe, A. B. and Trajtenberg, M., eds. Cambridge, MA: MIT Press (2005), 403–470.Google Scholar
Hall, R. A.“Framework Linking Intangible Resources and Capabilities to Sustainable Competitive Advantage.” Strategic Management Journal, 14 (1993), 607–618.Google Scholar
He, Z.-L., and Wong, P.-K.. “Exploration vs. Exploitation: An Empirical Test of the Ambidexterity Hypothesis.” Organization Science, 15 (2004), 481–494.CrossRefGoogle Scholar
Heckman, J. J.; Ichimura, H.; and Todd, P. E.. “Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme.” Review of Economic Studies, 64 (1997), 605–654.Google Scholar
Jaffe, A. B.“Characterizing the ‘Technological Position’ of Firms, with Application to Quantifying Technological Opportunity and Research Spillovers.” Research Policy, 18 (1989), 87–97.CrossRefGoogle Scholar
Jaffe, A. B.“The U.S. Patent System in Transition: Policy Innovation and the Innovation Process.” Research Policy, 29 (2000), 531–557.Google Scholar
Katila, R., and Ahuja, G.. “Something Old, Something New: A Longitudinal Study of Search Behavior and New Product Introduction.” Academy of Management Journal, 45 (2002), 1183–1194.Google Scholar
King, R., and Levine, R.. “Finance, Entrepreneurship, and Growth: Theory and Evidence.” Journal of Monetary Economics, 32 (1993), 513–542.CrossRefGoogle Scholar
Lanjouw, J. O., and Schankerman, M.. “Patent Quality and Research Productivity: Measuring Innovation with Multiple Indicators.” Economic Journal, 114 (2004), 441–465.CrossRefGoogle Scholar
Lavie, D.; Stettner, U.; and Tushman, M.. “Exploration and Exploitation within and across Organizations.” Academy of Management Annals, 4 (2010), 109–155.CrossRefGoogle Scholar
Lerner, J.; Sørensen, M.; and Strömberg, P.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445–477.Google Scholar
Levinthal, D. A., and March, J. G.. “The Myopia of Learning.” Strategic Management Journal, 14 (1993), 95–112.CrossRefGoogle Scholar
Li, G.-C.; Lai, R.; D’Amour, A.; Doolin, D. M.; Sun, Y.; Torvik, V. I.; Yu, A. Z.; and Fleming, L.. “Disambiguation and Co-Authorship Networks of the U.S. Patent Inventor Database (1975–2010).” Research Policy, 43 (2014), 941–955.CrossRefGoogle Scholar
Lowry, M.“Why Does IPO Volume Fluctuate So Much?” Journal of Financial Economics, 65 (2003), 3–40.Google Scholar
Maksimovic, V.; Phillips, G.; and Yang, L.. “Private and Public Merger Wages.” Journal of Finance, 68 (2013), 2177–2217.Google Scholar
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 2661–2700.Google Scholar
Manso, G.“Motivating Innovation.” Journal of Finance, 66 (2011), 1823–1860.Google Scholar
McGrath, R. G.“Exploratory Learning, Innovative Capacity and Managerial Oversight.” Academy of Management Journal, 44 (2001), 118–131.CrossRefGoogle Scholar
Nohria, N., and Gulati, R.. “Is Slack Good or Bad for Innovation?” Academy of Management Journal, 39 (1996), 1245–1264.CrossRefGoogle Scholar
Pagano, M.; Panetta, F.; and Zingales, L.. “Why Do Companies Go Public? An Empirical Analysis.” Journal of Finance, 53 (1998), 27–64.CrossRefGoogle Scholar
Peteraf, M.“The Cornerstones of Competitive Advantage: A Resource-Based View.” Strategic Management Journal, 14 (1993), 179–191.Google Scholar
Porter, M. E.“Capital Disadvantage: America’s Failing Capital Investment System.” Harvard Business Review, 70 (1992), 65–82.Google Scholar
Smith, W. K., and Tushman, M. L.. “Managing Strategic Contradictions: A Top Management Model for Managing Innovation Streams.” Organization Science, 16 (2005), 522–536.Google Scholar
Stein, J.“Takeover Threats and Managerial Myopia.” Journal of Political Economy, 96 (1988), 61–80.Google Scholar
Stein, J.“Efficient Capital Market, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655–669.CrossRefGoogle Scholar
Uotila, J.; Maula, M.; Keil, T.; and Zahra, S. A.. “Exploration, Exploitation, and Financial Performance: Analysis of S&P 500 Corporations.” Strategic Management Journal, 30 (2009), 221–231.CrossRefGoogle Scholar