empirical finance, corporate finance, innovation, economic development
Strategic overbidding in procurement auctions? (Latest version)
I find evidence that cash constrained firms take actions that improve their short-term liquidity even if they hurt long-term profitability. In government procurement auctions, constrained firms have incentives to overbid because winning a contract improves their short-term cash flows. However, overbidding results in lower long-term profits. I provide an unbiased estimate of the drop in performance of winners following an award by measuring performance relative to companies which placed second in the auction. I show that financial constraints predict aggressive bidding, that firms overbid less in auctions that require larger deposits, and that winning long-term contracts causes a short-term increase and subsequent decline in profitability. My results offer a non-behavioural explanation for the ``winner's curse''.
Financial markets and regional economic development.
(with Krzysztof Kalisiak)
We show that access to local financing supports economic development. Firms with easier access to financing respond to a future improvement in investment opportunities at the time the improvement is announced. Other firms catch up only after the improvement and associated cash flows are realized. We exploit variation caused by infrastructure development in the oil industry that exogenously affects firms in only one region and use nearby regions as control. The event creates a gap between announcement and realization dates, which eliminates the problem of reverse causality and highlights the role of financial constraints.
Firm behaviour after R&D breakthroughs.
I examine firm behaviour after major R&D breakthroughs. I use the example of pharmaceutical companies that carry out last-stage clinical trials for new oncology drugs. "Success" is defined as Food and Drug Administration approval to market new drugs. I argue that this alternative innovation measure is superior to commonly used patents and citations. Companies that obtain approval increase capital expenditure. However, there is no change to their research and development expenses, cash holdings, or short-term investments. This supports the hypothesis that innovative firms follow long-term strategies, and finalizing drug development, even though infrequent, does not radically change their behaviour.