Publications

"Innovation Search Strategy and Predictable Returns" (with Benjamin Balsmeier, Lee Fleming and Gustavo Manso)

(2021) Management Science 67(2): 1109-1137

Presentations: Global Entrepreneurship & Innovation Conference (2018); Texas A&M University (2018); Berkeley Fung Institute's Innovation and Finance Conference (2017); University of California, Berkeley (2017)

Abstract: Due to cognitive and strategic biases, we hypothesize that investors are likely to pay more attention to unfamiliar explorative patents rather than incremental, exploitative patents. We find that firms focusing on exploitation rather than exploration tend to generate superior subsequent operating performance. Analysts do not seem to detect this, as firms currently focused on exploitation tend to outperform the market’s near-term earnings expectations. The stock market also seems unable to accurately incorporate information about a firm's innovation strategy information. We find that firms pursuing exploitative innovation search strategies are undervalued relative to firms following exploration strategies and that this return differential is incremental to standard risk and innovation-based pricing factors examined in the prior literature.

"Unconstrained estimates of the equity risk premium" (with Stephen Gray, Jason Hall and Ravi Jeyaraj)

(2013) Review of Accounting Studies 18: 560-639

Abstract: Estimates of the equity risk premium implied by analyst forecasts - generally 2-4% - are often significantly below realized equity returns of 6%. Measurement error could result from conservative assumptions, reliance upon consensus rather than detailed forecasts, the use of market rather than target prices, and regression analysis, which can be influenced by outliers. We address these potential sources of measurement error. Our estimates are consistent with subsequently realized returns and capture systematic risk exposure. From 1999 to 2008, we estimate an average U.S. equity risk premium of 5.3%. The estimate increases from 3.1% for 1999–2000 to 5.9% from 2001–2008, comparable to past returns.

Working Papers

"Shared Culture and Technological Innovation: Evidence from Corporate R&D Teams" (with Xiaoding Liu)

Presentations: SFS Cavalcade North America (2024); China International Conference in Finance (CICF) (2024); Global Entrepreneurship and Innovation Research Conference (GEIRC) (2024); Financial Intermediation Research Society (FIRS) Conference (2023); Midwest Finance Association (MFA) Annual Meeting (2023); Ediburgh Corporate Finance Conference (2023); American Economic Association (AEA) Annual Meeting (2022); Western Finance Association (WFA) Annual Meeting (2021); American Finance Association (AFA) Annual Meeting (2021); Society of Labor Economists (SOLE) Annual Meeting (2021); University of Massachusetts (2021); Lone Star Finance Symposium (2020); EPFL Innovation Seminar (2020); Texas A&M University (2020)

Abstract: We open the black box of corporate innovation production by examining its most important input: the employees tasked with creating new inventions. Using a novel within-firm research design involving the universe of U.S. corporate inventors across four decades, we find that inventors’ shared cultural values are a critical driver of inventor team formation. Moreover, using premature co-inventor deaths as exogenous shocks to team composition, we document both positive and negative impacts of inventor team cultural diversity on team patent production. Less culturally diverse teams produce a higher overall quantity of patents that tend to exploit existing technologies, while more culturally diverse teams produce more risky, exploratory patents with a greater potential for high-impact innovations. Exploring the underlying mechanisms, we present evidence that culturally diverse teams tend to seek new knowledge from more heterogeneous and non-traditional input information sources, but they also face greater knowledge integration challenges. Overall, our results present a more nuanced perspective on diversity, revealing that it does not lead to uniformly better or worse outcomes, but instead impacts the type of R&D output.

"Til Death Do Us Part: The Relative Merits of Founder CEOs"

Presentations: New Zealand Finance Meeting (2022); Monash University (2022); University of Sydney (2022); University of Queensland (2022); Financial Markets and Corporate Governance Conference (2022); Midwest Finance Association (MFA) Annual Meeting (2020); Australasian Finance & Banking Conference (2020); Lone Star Finance Symposium (2019); Financial Management Association (FMA) Annual Meeting (2019); Texas A&M University (2019); University of California, Berkeley (2018)

Abstract: A question that is constantly faced by every firm in the economy is when is it optimal for a firm’s founder to lead the company as CEO? To identify the causal effect of founder CEOs on firm outcomes, I exploit a novel natural experiment that compares firms that experience an exogenous, health-related founder-to-professional CEO turnover with equivalent firms that can retain their founder CEO. I first find that founder CEOs and professional CEOs have distinct yet valuable skill sets. While founder CEOs promote higher internally generated innovation output than professional CEOs, professional CEOs counteract this reduced internal R&D productivity by undertaking other value enhancing activities, including acquiring external technologies through greater M&A activity, increasing firm leverage, and nurturing larger, more stable top management teams. I then show that the aggregate effect of these different strategies on total firm value depends on the firm’s level of technological complexity and life cycle stage.

"Financial Contracting for Innovation: Property Rights in Action"

Presentations: Australasian Finance & Banking Conference (2021); Financial Management Association (FMA) Annual Meeting (2020); Texas A&M University (2018); University of Georgia (2018); Vanderbilt University (2018); Nanyang Business School (2018); University of Melbourne (2017); Joint Berkeley-Stanford Finance Seminar (2017); University of California, Berkeley (2017)

Abstract: In property rights theory, financial contracting structures can align property rights to promote entrepreneurial firm innovation. I first provide novel estimates that strategic alliances have 6% to 11% higher overall innovative success rates compared to corporate VC and independent VC, respectively. Then, using a matched quasi-experiment in clinical trials to decompose selection (endogenous matching) and treatment effects, I find that strategic alliances promote 5% higher overall innovative success rates than both CVC and IVC (33% change in relative terms). I map the underpinnings of alliance success to the mechanisms of knowledge sharing and willingness to support costly experimentation.