Xuan Tian

Corporate Venture Capital, Value Creation, and Innovation

We analyze how corporate venture capitalists (CVCs) differ from independent venture capitalists (IVCs) in nurturing innovation in entrepreneurial firms. Using the NBER Patent Citation database, we find that CVCs help their portfolio firms achieve a higher degree of innovation productivity, as measured by their patenting, although these firms are younger, riskier, less profitable, and go public earlier compared to the entrepreneurial firms backed by IVCs. To establish causality, we use both an instrumental variable approach and a difference-in-difference approach, and show that the above baseline results are unlikely to be driven by the better selection ability on the part of CVCs. While our baseline results are based on VC-backed firms that eventually go public, we develop additional robustness tests using the entire universe of VC-backed private firms and show that our results are not driven by CVCs bringing their most innovative firms public: CVC-backed firms are more innovative regardless of their eventual exit outcomes or current investment status. Finally, we develop a simple theoretical model to analyze the mechanisms through which CVCs nurture innovation to a greater extent than IVCs, and test the implications of this model. Our analysis suggests that two possible mechanisms are CVCs’ greater tolerance for failure and greater industry specific knowledge arising from the strategic fit between the CVCs’ parent firms and the entrepreneurial firms they invest in.

Does Banking Competition Affect Innovation

We exploit the deregulation of interstate bank branching laws to test whether banking competition affects innovation. We find robust evidence that banking competition reduces state-level innovation by public corporations headquartered within deregulating states. Innovation increases among private firms that are dependent on external finance and that have limited access to credit from local banks. We argue that banking competition enables small, innovative firms to secure financing instead of being acquired by public corporations. Therefore, banking competition reduces the supply of innovative targets, which reduces the portion of state-level innovation attributable to public corporations. Overall, these results shed light on the real effects of banking competition and the determinants of innovation.

Do Anti-Takeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis

We study the effect of antitakeover provisions (ATPs) on innovation. To establish causality, we use a regression discontinuity approach that relies on locally exogenous variation generated by shareholder proposal votes. We find a positive, causal effect of ATPs on innovation. This positive effect is more pronounced in firms that are subject to a larger degree of information asymmetry and operate in more competitive product markets. The evidence suggests that ATPs help nurture innovation by insulating managers from short-term pressures arising from equity markets. Finally, the number of ATPs contributes positively to firm value for firms involved in intensive innovation activities.

Do Unions Affect Innovation

We examine the impact of unionization on the innovation activities of firms by exploiting a novel database of union elections. Firm innovation output, measured by patent counts and citations, declines significantly after firms elect to unionize and increases significantly for firms that vote to deunionize. To establish causality, we use a regression discontinuity design relying on “locally” exogenous variation in unionization generated by union elections that pass or fail by a small margin of votes. The market reaction to firms that elect to unionize is negatively related to firms’ past innovation output. Our evidence suggests unionization stifles innovation.

How Does Hedge Fund Activism Reshape Corporate Innovation

This paper studies how hedge fund activism reshapes corporate innovation. Firms targeted by hedge fund activists experience an improvement in innovation efficiency during the five-year period following the intervention. Despite a tightening in R&D expenditures, target firms experience increases in innovation output, measured by both patent counts and citations, with stronger effects seen among firms with more diversified innovation portfolios. We also find that the reallocation of innovative resources and the redeployment of human capital contribute to the refocusing of the scope of innovation. Finally, additional tests refute alternative explanations attributing the improvement to mean reversion, sample attrition, management’s voluntary reforms, or activists’ stock-picking abilities.We examine whether hedge fund activism affects corporate innovation. We find that firms targeted by hedge fund activists experience an improvement in innovation efficiency within three years after the intervention as evidenced by a significant drop in R&D spending but an increase in innovation output measured by both patent counts and citations. We then show that hedge fund activists improve target firms’ innovation efficiency via the reallocation of innovative resources and the redeployment of human capital. Finally, we show that the link between hedge fund interventions and improvements in innovation efficiency is potentially driven by firms’ assets reallocation triggered by activists. Our paper is the first study that sheds light on the real effect of strengthened shareholder power in reshaping corporate innovation. JEL Classification: G23, G34, O31

Location, Proximity, and M&A Transactions

In this paper, we examine how the geographic location of firms affects acquisition decisions and value creation for acquirers in takeover transactions. We find that firms located in an urban area are more likely to receive a takeover bid and complete a takeover transaction as a target than firms located in rural areas, and takeover deals involving an urban target are associated with higher acquirer announcement returns, after controlling for the proximity between the target and the acquirer. In addition, a targets urban location significantly attenuates the negative effect of a long distance between the target and the acquirer on acquirer returns, a fact that is documented in the existing literature. Our findings reveal a previously underexplored force—firm location—that can affect takeover transactions, in addition to proximity. Our paper suggests that a firms location plays an important role in facilitating the dissemination of soft information and enhancing information-based synergies.

How Do Foreign Institutional Investors Enhance Firm Innovation

We examine the effect of foreign institutional investors on firm innovation. Using firm-level data across 26 non-U.S. economies between 2000 and 2010, we show that foreign institutional ownership has a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which foreign institutions affect firm innovation: foreign institutions act as active monitors, provide insurance for firm managers against innovation failures, and promote knowledge spillovers from high-innovation economies. Our paper sheds new light on the real effects of foreign institutions on firm innovation.

'Preparing' the Equity Market for Adverse Corporate Events: A Theoretical Analysis of Firms Cutting Dividends

This paper presents the first theoretical analysis of the choice of firms between “preparing” and not preparing the equity market in advance of a possible dividend cut. In our model, insiders have private information about their firm’s intermediate cash flow as well as about the net present value of its growth opportunity. We show that, in equilibrium, firms in temporary financial difficulties but with good long-term growth prospects are more likely to prepare the market in advance of dividend cuts, while those with permanently declining earnings are less likely to prepare the market. Our model generates several new testable predictions.

Short Sellers and Innovation: Evidence from a Quasi-Natural Experiment

We examine whether short sellers exacerbate or mitigate managerial myopia by using a firm’s patenting activities to capture managers’ myopic behavior. To establish causality, we use exogenous variation in short-selling costs generated by a quasi-natural experiment, Regulation SHO, which removes the tick restriction on a randomly-chosen subsample of Russell 3000 firms. We find that the quality, value, and originality of patents generated by treatment firms improve significantly more than control firms surrounding Regulation SHO, suggesting that short sellers are able to mitigate managerial myopia in investment decisions. The exposure to patenting-related litigation initiated by short sellers is a plausible mechanism through which short sellers curb myopic behavior, and managers of more opaque firms voluntarily disclose more information about their innovation activities in response to such litigation risk. Our paper provides new insights into a surprising and unintended real effect of short sellers – their mitigation of managerial myopia.

What Affects Innovation More: Policy or Policy Uncertainty?

Motivated by a theoretical model, we empirically examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more. We find that innovation, measured by growth in patent counts, citations, and originality, is not, on average, affected by which policy is in place. Innovation, however, drops significantly during times of policy uncertainty measured by national elections. To establish causality, we use close presidential elections, whose timings are pre-determined and results are unpredictable, and ethnic fractionalization that are likely exogenous to policy and policy uncertainty. Political compromise, our paper concludes, is a plus for innovation.