Does Financial Innovation Lead to Real Innovation? Evidence from Financial Derivatives

64 Pages Posted: 28 Jun 2016 Last revised: 7 May 2019

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Lora Dimitrova

University of Exeter

Sapnoti Eswar

University of Cincinnati - Department of Finance - Real Estate

Date Written: May 2, 2019

Abstract

We investigate whether financial innovation, specifically the introduction of derivative products, spurs firms’ real innovation, measured with patent based metrics. Consistent with financial innovation being an important contribution to real innovation, we find that the use of financial derivatives causes firm patent production to increase. The main mechanism behind the relationship is improved risk management. Derivatives usage decreases cash flow volatility, decreasing the need for external financing, and allowing firms to expand their innovative projects.

Keywords: Real innovation, FX derivatives, Risk management

JEL Classification: G31, G32, O31

Suggested Citation

Brogaard, Jonathan and Dimitrova, Lora and Eswar, Sapnoti, Does Financial Innovation Lead to Real Innovation? Evidence from Financial Derivatives (May 2, 2019). Available at SSRN: https://ssrn.com/abstract=2801066 or http://dx.doi.org/10.2139/ssrn.2801066

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Lora Dimitrova

University of Exeter ( email )

Northcote House
The Queen's Drive
Exeter, Devon EX4 4QJ
United Kingdom

Sapnoti Eswar (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

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