Common Ownership and Innovation Efficiency

57 Pages Posted: 27 Nov 2019 Last revised: 2 Oct 2021

See all articles by Xuelin Li

Xuelin Li

University of South Carolina - Darla Moore School of Business

Tong Liu

University of Pennsylvania - Finance Department

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Date Written: October 1, 2021

Abstract

How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common ownership leads VCs to shut down lagging drug projects, withhold funding from lagging startups, and redirect those startups' innovation. These results support theories dating back to Loury (1979): By coordinating R&D efforts across competing firms, a common owner can reduce duplication of R&D. Consistent with common ownership improving innovation efficiency, common ownership rates are positively correlated with the ratio of R&D output to funding. Though we highlight gains in innovation efficiency, common VC ownership can also impose social costs.

Keywords: venture capital, common ownership, competition, healthcare

JEL Classification: G24, L41, L10

Suggested Citation

Li, Xuelin and Liu, Tong and Taylor, Lucian A., Common Ownership and Innovation Efficiency (October 1, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3479439 or http://dx.doi.org/10.2139/ssrn.3479439

Xuelin Li

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

Tong Liu

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: http://sites.google.com/view/tongl

Lucian A. Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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