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)

November 4, 2014

Kelley School of Business Research Paper No. 2014-43

Abstract:     
Using a sample of venture capital (VC)-backed initial public offering (IPO) firms, we study the effect of financial intermediaries’ tight leash on entrepreneurs’ innovation productivity. We find that financial intermediaries’ tight leash impedes innovation: IPO firms are significantly less innovative when VCs interfere with their development more frequently through staging — as measured by a larger number of VC financing rounds. To establish causality, we exploit 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. Furthermore, staging is more detrimental to innovation when innovation is more difficult to achieve and when VCs are less experienced with the industry in which their entrepreneurial firms operate. By documenting a previously under-recognized adverse consequence of VC stage financing, our evidence suggests that contract mechanisms are at play so that short-termist incentives can be cultivated even in a private equity market populated with long-term, sophisticated investors.

Number of Pages in PDF File: 54

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

JEL Classification: G24, O31, G34

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

Suggested Citation

Mao, Yifei and Tian, Xuan and Yu, Xiaoyun, Unleashing Innovation (November 4, 2014). Kelley School of Business Research Paper No. 2014-43. 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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