Abstract

http://ssrn.com/abstract=2336309
 


 



Unleashing Innovation


Yifei Mao


Indiana University - Kelley School of Business - Department of Finance

Xuan Tian


Indiana University - Kelley School of Business - Department of Finance

Xiaoyun Yu


Indiana University - Kelley School of Business - Department of Finance; China Academy of Financial Research (CAFR)

October 4, 2013


Abstract:     
Using a sample of venture capital (VC)-backed initial public offering (IPO) firms, we study the impact of financial intermediaries’ tight leash on entrepreneurs’ innovation productivity. We find IPO firms are significantly less innovative when VCs keep a tighter leash on them by interfering with their development more frequently — as measured by a larger number of VC financing rounds. To establish causality, we exploit the plausibly exogenous variation in the frequency of direct flights between VC domiciles and IPO firm headquarters that are due to airline restructuring. Our identification tests suggest a negative, causal effect of VC staging on firm innovation. We further show that staging is more detrimental to firm innovation when innovation is more difficult to achieve, when IPO firms operate in more competitive product markets, and when VCs are less experienced with the industry to which the entrepreneurial firms belong. Our findings suggest that excessive interference by financial intermediaries impedes innovation, and shed light on a previously under-recognized adverse consequence of VC stage financing.

Number of Pages in PDF File: 51

Keywords: Innovation, Stage financing, Venture capital, Short-termism

JEL Classification: G24, O31, G34

working papers series


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Date posted: October 6, 2013 ; Last revised: May 13, 2014

Suggested Citation

Mao, Yifei and Tian, Xuan and Yu, Xiaoyun, Unleashing Innovation (October 4, 2013). Available at SSRN: http://ssrn.com/abstract=2336309 or http://dx.doi.org/10.2139/ssrn.2336309

Contact Information

Yifei Mao
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States

Xuan Tian (Contact Author)
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. Tenth Street
Bloomington, IN 47405
United States
812-8553420 (Phone)
824-8555875 (Fax)
HOME PAGE: http://kelley.iu.edu/tianx

Xiaoyun Yu
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3521 (Phone)
812-855-5875 (Fax)

China Academy of Financial Research (CAFR)
1954 Huashan Road
Shanghai P.R.China, 200030
China

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