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Asia-Pacific Financial Markets

25.01.2024

Does Innovation Relieve Corporate Financial Distress?

verfasst von: Keming Li

Erschienen in: Asia-Pacific Financial Markets

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Abstract

This paper examines whether innovation ability improves corporate performance of financially distressed firms. I begin by providing direct evidence that innovative firms in financial distress have significantly better future operating performance. To identify the causal effect, I study an exogenous shock—State Street Bank and Trust Company v. Signature Financial Group, Inc.—and find that an increase in innovation ability causes an improvement in future performance of distressed firms. Financial markets tend to pay more attention to innovative distressed firms, but these firms do not earn abnormal equity returns than their counterparts. I document that average investors hold pessimistic perspectives on distressed firms with innovation ability. In contrast, institutional investors have contrarian beliefs on distressed firms with innovation ability and hold more shares in these firms.

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In this paper, innovation ability means the ability of generating innovations, such as patents and citations.

Josh Lerner (2002) documented that significantly more financial patents have been issued since the ruling (1998) and more applications have been submitted.

Firm ROA ratio is defined as Net Income/Total Assets. The components of the ROA ratio are defined as following: Net Income/Total Assets = (Net Income/Revenue)*(Revenue/Total Assets).

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Dichev (1998) shows that both the Altman Z-score and Ohlson O-score offer high levels of predictive power for out-of-sample bankruptcy.

Patent subcategory is based on the technology classification system of the USPTO.

The updated NBER patent database is available at https://sites.google.com/site/patentdataproject/Home/downloads.

As robustness check, I use a Fama and MacBeth (1973) model to run tests and all results remain qualitatively similar.

Jepsen (2006) provides details effects of State Street Bank v. Signature Financial Group on the number of patents applied and issued, before and after.

Software related patents accounted for 20 percent of the yearly patents in 1991. By 2011, the number raised to 50 percent according to the Government Accounting Office (GAO) Analysis of US PTO Data.

There are other matching schemes including Caliper matching, Mahalanobis metric matching, and Stratification matching. However, the results suggest that the nearest neighbor provides the best matching between treatment group and control group. I also replicate the DID tests based on other matching methods and the results are not affected.

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FRED includes monthly data on treasury bonds and notes for one-, two-, three-, five-, seven-, 10-, 20- and 30-year constant maturity rates. We match the corporate bond data to the corresponding treasury rate. For example, if a corporate bond’s remaining time to maturity is more than five years and less than seven years, we match it to a seven-year constant maturity rate. For corporate bonds with a period to maturity of more than 30 years, we use the 30-year constant maturity rate.

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Titel: Does Innovation Relieve Corporate Financial Distress?
verfasst von: Keming Li
Publikationsdatum: 25.01.2024
Verlag: Springer Japan
Erschienen in: Asia-Pacific Financial Markets
Print ISSN: 1387-2834
Elektronische ISSN: 1573-6946
DOI: https://doi.org/10.1007/s10690-023-09445-4