Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-24T18:37:43.787Z Has data issue: false hasContentIssue false
  • English
  • Français

Making Waves: To Innovate or Be a Fast Second?

Published online by Cambridge University Press:  10 June 2016

Chris Yung
Chris Yung*
Affiliation:
[email protected], University of Virginia, McIntire School of Commerce, Charlottesville, VA 22904.
*
*Corresponding author: [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

Internal finance leads to a stalemate in innovation games; each firm wants to free-ride on the others’ costly experimentation. When instead innovation is financed externally (e.g., with venture capital or initial public offerings), there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimistic information. I characterize the relative sizes of waves of leaders and followers in innovation cycles, and the endogenous, intertemporal distribution of quality as each wave builds and crashes. Finally, old waves leave an adverse selection “hangover,” such that too much early innovation can cause the market for future innovation to break down.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 415 - 433
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

References

Acharya, V., and Xu, Z.. “Financial Dependence and Innovation: The Case of Public versus Private Firm.” Journal of Financial Economics, forthcoming (2016).Google Scholar
Alti, A. “IPO Market Timing.” Review of Financial Studies, 18 (2005), 1105–1138.CrossRefGoogle Scholar
Atanassov, J.; Nanda, V.: and Seru, A.. “Finance and Innovation: The Case of Publicly Traded Firms.” Working Paper, University of Michigan (2007).Google Scholar
Banerjee, S.; Güçbilmez, I.; and Pawlina, G.. “Leaders and Followers in Hot IPO Markets.” Journal of Corporate Finance, 37 (2016), 309–334.Google Scholar
Benveniste, L.; Busaba, W.; and Wilhelm, W.. “Information Externalities and the Role of Underwriters in Primary Equity Markets.” Journal of Financial Intermediation, 11 (2002), 61–86.Google Scholar
Bergemann, D., and Hege, U.. “The Financing of Innovation: Starting and Stopping.” RAND Journal of Economics, 36 (2005), 719–752.Google Scholar
Bolton, P., and Harris, C.. “Strategic Experimentation.” Econometrica, 67 (1999), 349–374.Google Scholar
Bouvard, M. “Real Option Financing under Asymmetric Information.” Review of Financial Studies, 1 (2014), 180–210.Google Scholar
Brown, J.; Fazzari, S.; and Peterson, B.. “Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom.” Journal of Finance, 64 (2009), 151–184.Google Scholar
Brown, J.; Martinsson, G.; and Peterson, B.. “Law, Stock Markets and Innovation.” Journal of Finance, 10 (2013), 1517–1549.Google Scholar
Brown, J., and Peterson, B.. “Public Entrants, Public Equity Finance, and Creative Destruction in the High-Tech Sector.” Journal of Banking and Finance, 34 (2009), 1077–1088.Google Scholar
Bustamante, M. “The Dynamics of Going Public.” Review of Finance, 16 (2012), 577–618.Google Scholar
Chamley, C., and Gale, D.. “Information Revelation and Strategic Delay in a Model of Investment.” Econometrica, 62 (1994), 1065–1085.Google Scholar
Colak, G., and Gunay, H.. “Strategic Waiting in IPO Markets.” Journal of Corporate Finance, 17 (2011), 555–583.CrossRefGoogle Scholar
Decamps, J., and Mariotti, T.. “Investment Timing and Learning Externalities.” Journal of Economic Theory, 118 (2004), 80–102.Google Scholar
Ferreira, D.; Manso, G.; and Silva, A.. “Incentives to Innovate and the Decision to Go Public or Private.” Review of Financial Studies, 27 (2014), 256–300.Google Scholar
Ederer, F. “Launching a Thousand Ships: Incentives for Parallel Innovation.” Working Paper, University of California, Los Angeles (2012).Google Scholar
Gompers, P., and Lerner, J.. The Venture Capital Cycle, 2nd ed. Cambridge MA: MIT Press (2004).Google Scholar
Grenadier, S. “Information Revelation through Option Exercise.” Review of Financial Studies, 12 (1999), 95–129.Google Scholar
Grenadier, S., and Malenko, A.. “Real Options Signaling Games with Applications to Corporate Finance.” Review of Financial Studies, 12 (2011), 3993–4036.Google Scholar
Grenadier, S.; Malenko, A.; and Strebulaev, I.. “Investment Busts, Reputation, and the Temptation to Blend in with the Crowd.” Journal of Financial Economics, 111 (2014), 137–157.CrossRefGoogle Scholar
Grenadier, S., and Wang, . “Investment Timing, Agency, and Information.” Journal of Financial Economics, 75 (2005), 493–533.Google Scholar
Hoffmann-Burchardi, U. “Clustering of Initial Public Offerings, Information Revelation and Underpricing.” European Economic Review, 45 (2001), 353–383.Google Scholar
Hsu, P.; Tian, X.; and Xu, Y.. “Financial Development and Innovation: Cross-Country Evidence.” Journal of Financial Economics, 112 (2014), 116–135.Google Scholar
Kortum, S., and Lerner, J.. “Assessing the Contribution of Venture Capital to Innovation.” RAND Journal of Economics, 31 (2000), 674–692.Google Scholar
Lerner, J.; Sorensen, M.; and Strömberg, P.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445–477.CrossRefGoogle Scholar
Ljungqvist, A., and Richardson, M.. “The Investment Behavior of Private Equity Fund Managers.” Working Paper, New York University (2003).Google Scholar
Manso, G. “Motivating Innovation.” Journal of Finance, 66 (2011), 1823–1869.Google Scholar
Markides, C., and Geroski, P.. Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets. San Francisco, CA: Jossey-Bass (2004).Google Scholar
Morellec, E., and Schürhoff, N.. “Corporate Investment and Financing under Asymmetric Information.” Journal of Financial Economics, 99 (2011), 262–288.Google Scholar
Pastor, L., and Veronesi, P.. “Rational IPO Waves.” Journal of Finance, 60 (2005), 1713–1757.Google Scholar
Persons, J., and Warther, V.. “Boom and Bust Patterns in the Adoption of Financial Innovations.” Review of Financial Studies, 10 (1997), 939–967.Google Scholar
Welch, I. “Equity Offerings Following the IPO: Theory and Evidence.” Journal of Corporate Finance, 2 (1996), 227–259.Google Scholar