Intellectual Property Rights and Debt Financing, Review of Financial Studies (Accepted, 2022)
I examine how the investment and financing of innovation are affected by the contractual allocation of intellectual property rights using a Federal Circuit ruling that increased firms' property rights to employee patents. I find that treatment firms' total debt-to-assets ratio and R&D spending increase by 18% and 9%, respectively, as the residual control over patents increases firms' incentives to innovate. These effects are more pronounced when ex-ante holdup exposure is high. Furthermore, I find a positive marginal effect of asset complementarity as it helps limit the decline in employee incentives. Consistently, I also show that firms' ex-post asset complementarity improves.
Who Finances Disparate Startups? (with S. Katie Moon)
Dozens of mid-sized U.S. cities are fostering startups as regional technology hubs. Using detailed early-stage firm information from Crunchbase, we show such a diminishing industrial agglomeration trend driven by the angel financing. This trend is tied to angel investors’ unique portfolio selection of startups that diverges from venture capitals’ approach. Specifically, angel investors make geographically concentrated investments with industry diversification, while venture capital investors make industry-concentrated investments with relatively greater geographic diversification. We also show that angel investors’ portfolio selection of disparate startups enhances their average portfolio firm performance and plays an important economic role in forming the local entrepreneurial ecosystem.
How does financing affect R&D responses to import penetration? (with Sreedhar Bharath)
We examine the impact of Chinese import penetration on U.S. firms' R&D investment and subsequent performance, conditional on the access to financing. When import penetration rises, we find that old-highQ firms raise more debt while young-highQ firms raise more equity. Subsequently, young-highQ firms’ R&D investment, product differentiation and financial market performance decline. In contrast, old-highQ firms increase their in-process R&D but suffer declines in their accounting performance. We conclude that capital market funding is critical for young-highQ firms to continue R&D and capital investments to survive import competition. In particular, young-highQ firms that secure funding ex-ante are also financially successful.
Inter-firm Patent Litigation and Innovation Competition (with Jongsub Lee and Seungjoon Oh)
Using novel inter-firm patent litigation data, we show a significant interplay between intellectual property rights' boundaries and product market dynamics. Instrumenting the probability of patent litigation with the passage of China's National Intellectual Property Strategy, we find that patent litigation reduces defendant firms' innovation activity and fosters more exploitative innovation strategy that leverages past experience and expertise. These effects strengthen with product market overlap between litigants. We also find that patent litigation intensifies product market competition among close rivals but results in a dispersed firm distribution within industry, inducing an industry structure where Schumpeterian effect of competition is more likely.