Essays in Finance and Innovation

Abstract

This dissertation consists of three essays on Finance and Innovation. The first essay argues that openness of research inputs can enable greater exploration of new research lines, particularly by academic researchers. We test this hypothesis by examining a natural experiment: NIH agreements that reduced the access costs imposed on academics regarding certain genetically engineered mice. We find that increased openness encourages the exploration of more diverse research paths, and does not reduce research into the creation of new genetically engineered mice. Overall, our findings highlight a neglected cost of strong intellectual property restrictions: lower levels of exploration leading to a reduction in the diversity of research output. The second essay analyzes clustering in firms’ layoff behavior and its links to financial markets. We develop a model in which managers delay layoffs during good economic states to avoid damaging their reputation. We test the model’s predictions by comparing the layoff behavior of publicly-listed and privately-held firms, and find that the layoffs of public firms are twice as sensitive to recessions. In addition, we find that the firms which cluster layoff announcements at high frequencies are also more likely to engage in mass layoffs during recessions. Our findings suggest that reputation management is an important driver of layoff policies both at daily frequencies and over the business cycle, and can have significant macroeconomic consequences. The third essay explores the relationship between funding availability and innovative output. I develop a theory of credit constraints in multi-stage research, and predict that greater funding leads to both transitions into the private sector and a shift toward shorterhorizon projects. Analyzing the patent output of a panel of life-science researchers linked to top universities, I find that greater funding availability leads to an increase in transitions from academia to the private sector and a higher quantity of patent output, but a decrease research value, innovative scope, and the time horizon of subsequent applications. These results indicate that profit-motivated funding not only increases the quantity of innovation, but also leads to a significant shift in the type of projects being pursued.