Date of Degree

9-2018

Document Type

Dissertation

Degree Name

Ph.D.

Program

Business

Advisor

Jun Wang

Committee Members

Joseph Weintrop

Yao Shen

Karl Reiner Lang

Subject Categories

Corporate Finance

Keywords

Innovation, Policy Uncertainty, Patent Litigation, Patent, Investment Strategy

Abstract

The aim of the dissertation is to explore firms’ innovation strategies during certain stressful periods. This dissertation consists of 3 chapters. . .

Chapter 1: Innovation Diversification Under Policy Uncertainty

Using detailed data on patent grants and applications, I explore the effect of policy uncertainty on firms’ innovation strategies. I show that firms that invest in R&D tend to pursue more diversified strategies and are more likely to explore unfamiliar fields during periods of policy uncertainty. These findings hold after adjusting for possible sample-selection bias using variation from patent examiners’ historical approval rates, and after adjusting for potential endogeneity using pre-scheduled gubernatorial elections for neighbor states. To understand the factors that underlie this phenomenon, I conduct a variety of heterogeneity tests and find that a firm’s tendency to diversify is limited if it is financially constrained, holds irreversible assets, or relies heavily on pay-performance incentive contracts for managers. In addition, firms with higher sensitivity to government spending follow less diversified strategies, while firms facing higher product market competition are more likely to explore new fields.

Chapter 2: Less Competition, Slower R&D: The Impact of Joint Ventures Under Policy Uncertainty

I provide evidence showing that during periods of high policy uncertainty, firms with R&D joint ventures defer innovation investments further compared to firms that use competing innovation strategies. The deferral effect is mainly driven by joint ventures among potential market competitors and joint ventures among domestic firms. Furthermore, the deferral effect dies away when firms face a higher level of market competition. The results provide a detailed picture of the influence of R&D joint ventures during the period of policy uncertainty. It reduces the preemption value of the investment when competitors share the proprietary benefits but allow firms to fully appreciate the flexibility value of the project by waiting longer.

Chapter 3: Ripple Effect of Patent Litigation Shock

I show that firms react positively to their peers’ patent litigation suffering by increasing their investments in R&D and their applications for patents protection. The reaction is mainly taken when more peer firms are asserted by non-practicing entities (NPEs) and largely disappears when more peer firms are asserted by practicing entities (PEs). Furthermore, the reaction is stronger for firms that are more likely to be litigated, firms that perform in the highly competitive market and firms with high CEO pay-performance sensitivity. The results support the threat side story that the increase in peer firms’ litigation risk enhances firms’ awareness of patent protection. I test it directly on a subsample of firms that report non-zero R&D expenditure and find that the probability of having a patent protection increases significantly after more peer firms get involved in patent litigation issues.

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