Essays on Corporate Innovation

Abstract

This dissertation empirically explores the facets of corporate innovation in the firm and the ultimate effects on firm value. In the first chapter I identify firm innovation as a new channel by which employee treatment affects firm value. Growth and innovation incentive theories support positive effects of “good” employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since in the “new economy”, human capital is increasingly essential to firm value and the growth and success of a firm has become more reliant on corporate innovation. Using the KLD Research & Analytics, Inc. SOCRATES database and newly acquired patent/citation data, I find an overall significant positive relationship between positive employee treatment and innovation quantity (patents) and quality (citations per patent); both measures are significantly correlated to firm value in the literature. Furthermore, I find that favorable employee treatment improves innovation focus – innovation projects more related to firms’ core business. These findings, robust to an alternate data source and endogeneity concerns, are consistent with the theories of growth and innovation incentive and suggest corporate innovation represents a channel by which employee treatment enhances firm value. In the second chapter I use the context of mergers & acquisitions (M&A) to investigate the effect of firm innovative ability. Acquirer announcement returns in M&A are known for being low on average; however, recent studies indicate greater abnormal announcement and long-run returns to firms motivated by the acquisition of innovation. Although acquiring innovation is an important motive for M&A, prior studies have ii mostly focused on the characteristics of target firms. In this paper, I explore the effect of acquirers’ innovative abilities in the M&A transaction. I propose that acquirer’s ex-ante ability to transform internal and external innovation investment into a tangible valued output (i.e. sales or profitability) is subject to asymmetric information. I apply a unique measure of innovative ability to explain the cross-sectional variation in acquirer returns for mergers and find a positive relation between acquirers’ innovative abilities and their abnormal returns around M&A announcements. I further discover that greater CARs in high innovative ability acquirers only exist in a subsample of M&As in the later life cycle of firms. For early merger events (the first three M&As after IPOs), acquirers’ innovative abilities are not associated with significantly larger announcement returns, suggesting an altered market perception of the value impact of acquisitions of innovation and innovative ability.