firm innovation and financial analysis: how do they interact?cepr.org/sites/default/files/peress,...
TRANSCRIPT
![Page 1: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/1.jpg)
Firm Innovation and Financial Analysis: How Do They Interact?
Jim Goldman
University of Toronto
Firm Innovation and Financial Analysis
Joel Peress
INSEAD, CEPR
1
![Page 2: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/2.jpg)
0
5
10
15
20
25
0
10
20
30
40
50
60
70
80
90
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Nb. of analysts
$m
R&D expenditures Analyst coverage
FROM 1997Starts to develop own
proprietary drugs
An example: Barr Laboratories
2
UNTIL 1997Pure generic drugs manufacturer
Firm Innovation and Financial Analysis
![Page 3: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/3.jpg)
In a Large Sample
Firm Innovation and Financial Analysis 3
![Page 4: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/4.jpg)
Overview• A model of financial development and technological progress
• Main insight: Feedback loop between financial analysis and firm innovation
1. When financiers are better informed about innovation:
Entrepreneurs expect to receive more funding if innovation is successful
Entrepreneurs innovate more
2. Conversely, when entrepreneurs innovate more:
Fin. anticipate a higher return on capital if they manage to identify successful firms
Financiers collect more information about innovation
– Comes from complementarity between productivity A and capital K in production: Y = AK
• Evidence supporting 1. and 2. from two “experiments” that affect a consistent set of firms
– Economically sizeable effect: indirect effect of R&D policy change, operating through analysts’ response, is about one third of the size of its total effect
4Firm Innovation and Financial Analysis
![Page 5: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/5.jpg)
Technologies• Intermediate goods are produced by a continuum of projects indexed by n ∈ [0, 1]
– Kn : project n’s capital stock
– Ãn : project n-specific random productivity shock
– α ∈ [0, 1] : determines the degree of returns to scale
• Final good producers use intermediate goods as inputs
– Y is the total output of all intermediate goods:
5Firm Innovation and Financial Analysis
![Page 6: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/6.jpg)
• Risk-neutral agents derive utility from the consumption of a final good
• Entrepreneur creates intermediate technologies
– Conceives a continuum of projects
– Chooses the productivity of tech. in both states ( , ) = “innovation effort”
– But cannot influence probability of success (= 0.5)
– Innovation effort has a cost eA( + ) (increasing and convex in A)
– Chooses same effort for all projects (prevents entrepreneur from focusing on one project only)
Agents: Entrepreneur0.5
0.5
Firm Innovation and Financial Analysis
![Page 7: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/7.jpg)
• Financier invests his wealth (endowed)
– Allocates Kn units of capital to project n
– Learns quality of project thanks to imperfect signal S
• With proba q, signal reveals successful project accurately (but 1 − q of being wrong)
• q : the “learning effort” chosen by the financier
• Learning effort has a cost eq(q) (increasing and convex in q)
Agents: Financier
Firm Innovation and Financial Analysis
![Page 8: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/8.jpg)
Timing
8Firm Innovation and Financial Analysis
• Period 1
– First: entrepreneur and financier choose cooperatively
• Research effort: A
• Learning effort: q
– Then: financier observes signal S and invests across projects Kn
• Period 2
– Goods are produced and agents consume
![Page 9: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/9.jpg)
Equilibrium Concept1. Market clearing in the intermediate good market:
1. Capital allocation:
2. First-best determination of effort levels:
– Entrepreneur & financier choose efforts cooperatively (before the signal S is observed):
9Firm Innovation and Financial Analysis
![Page 10: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/10.jpg)
Learning and Research• In equilibrium, learning and research efforts are the unique solutions to the system:
• The financier allocates:
– units of capital to projects deemed successful by its signal
– and to those deemed unsuccessful
• The research effort is increasing in the learning effort. Conversely, the learning effort is increasing in the research effort
10Firm Innovation and Financial Analysis
![Page 11: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/11.jpg)
Interaction Between Learning and Research • Knowledge about technologies and technological knowledge feed on each other
– q in A: Each unit of capital is more productive the larger the innovation effort A
– A in q : An invention can be applied on a larger scale the larger K
• Effect comes from complementarity between productivity An and capital Kn in production of intermediate goods:
• Growth rate of income (in OLG model):
11Firm Innovation and Financial Analysis
Quality of the match between projects and K
![Page 12: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/12.jpg)
• The entrepreneur performs more research when the financier learns more
• The financier learns more when the entrepreneur does more research
• Auxiliary predictions on the mechanism
– An increase in learning effort lead to a more dispersed distribution of capital across projects
– An increase in learning or research effort lead to a more dispersed distribution of return on capital across projects
Summary of Main Predictions
12
where ε*A = 1+elast. of e’(A) w.r.t. A
where ε*q = 1+elast. of e’(q) w.r.t. q
Firm Innovation and Financial Analysis
![Page 13: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/13.jpg)
Empirical Strategy
• Measurement: Proxies for learning and research efforts
– Research effort proxied by firm’s level of R&D expenditures (“R&D”)
– Learning effort proxied by number of analysts following the firm (“Coverage”)
• Endogeneity: Simultaneity and possible omitted variables
– Two sets of plausibly exogenous shocks
1. R&D shocks: passage of US States R&D tax credits
2. Learning shocks: loss of analysts due to mergers and closures of brokerage houses
13Firm Innovation and Financial Analysis
![Page 14: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/14.jpg)
R&D Shock: US States R&D Tax Credits• Allow firms to reduce their state tax liability by deducting a portion of R&D
expenditures from their state tax bill
• Followed the implementation of federal tax credits in 1981
• Minnesota started in 1982, 32 other states followed (as of 2006)
• TC rates range from 3% (NE, SC) to 20% (AZ, HI).
14Firm Innovation and Financial Analysis
![Page 15: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/15.jpg)
Learning Shock : Brokerage Closures and Mergers• Closures of and mergers between brokerage houses which lead to reduction in analyst
coverage:
– Closures that lead to the removal of analysts who are not re-hired by a new broker
– Mergers that lead to the dismissal of redundant analysts who follow the same stocks as analysts working for the other merging entity
• 52 events from Derrien and Kecskes (2013)
15Firm Innovation and Financial Analysis
![Page 16: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/16.jpg)
Sample Construction• To properly estimate interaction effect, we use a common sample for both experiments
– Compustat firms
– Manufacturing firms for which R&D is material to the business (R&D>0)
– Followed (and shocked) over 1990 – 2006
• In the learning experiment, treatment affects mainly large firms
– To improve accuracy, restrict to firms with sufficient overlap on covariates
• Estimate propensity score for firms in each experiment using industry, sales, profitability variables
• Keep firms with score between 0.1 and 0.9 for both experiments
• End up with around 1000 firms
– Large: median average revenue of $640m
– Investing in R&D: median R&D/assets = 4.4%
16Firm Innovation and Financial Analysis
![Page 17: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/17.jpg)
Descriptive Statistics
17
Note: one observation per firm (the average over time)
Firm Innovation and Financial Analysis
25th 50th 75th N 50th in Compu.
Coverage 3.80 7.50 14.00 1,011 1.70R&D ($m) 6.59 16.32 48.94 1,011 2.26R&D/assets 1.79 4.41 10.21 1,011 3.12Sales ($m) 193.65 637.33 2,630.64 1,011 76.92ROA 4.74 9.33 13.76 1,011 4.01
![Page 18: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/18.jpg)
Specification• Difference-in-differences ; panel regression
• Regression estimated in first-differences
– Accommodates repeated shocks– Removes firm fixed effects
• Symmetric specifications
– R&D shock: Tax credit, s is state– Learning shock: Broker event, b is broker– For both shocks, X includes ln(sales) and loss dummy– Standard errors clustered at industry level
18Firm Innovation and Financial Analysis
![Page 19: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/19.jpg)
Shocks Validation
19Firm Innovation and Financial Analysis
Δln(rd) Δln(rd) Δln(rd) Δln(cov) Δln(cov) Δln(cov)TC+t+1 0.016
[0.017]TC+t 0.036** 0.045** 0.042**
[0.015] [0.017] [0.018]TC+t-1 -0.013
[0.011]AN-t+1 0.015
[0.018]AN-t -0.105*** -0.087*** -0.066***
[0.023] [0.024] [0.019]AN-t-1 -0.025*
[0.014]Year FE Yes Yes Yes Yes Yes YesControls No Yes Yes No Yes YesN 9,953 8,337 7,248 9,953 8,337 7,248
![Page 20: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/20.jpg)
Effect of Learning on Innovation – and of Innovation on Learning
20Firm Innovation and Financial Analysis
Δln(rd) Δln(rd) Δln(rd) Δln(cov) Δln(cov) Δln(cov)TC+t+1 0.002
[0.018]TC+t 0.038** 0.052*** 0.056***
[0.019] [0.019] [0.019]TC+t-1 0.002
[0.016]AN-t+1 -0.011
[0.019]AN-t -0.039*** -0.025** -0.035**
[0.015] [0.012] [0.013]AN-t-1 -0.004
[0.015]Year FE Yes Yes Yes Yes Yes YesControls No Yes Yes No Yes YesN 9,953 8,337 7,248 9,953 8,337 7,248
![Page 21: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/21.jpg)
Auxiliary Predictions of the Model
21Firm Innovation and Financial Analysis
S.D. MeanF-stat for Variance
Ratio Test, V(before)/V(after)
p-value
Before (2 yr average) R&D tax credit 0.692 0.049 0.65*** 0.003After (2 yr average) R&D tax credit 0.860 -0.055
Distribution of new equity proceeds
S.D. MeanF-stat for Variance
Ratio Test, V(before)/V(after)
p-value
Before (2 yr average) R&D tax credit 0.136 0.024 0.74*** 0.007After (2 yr average) R&D tax credit 0.158 -0.007
Before (2 yr average) broker event 0.118 0.015 1.34** 0.033After (2 yr average) broker event 0.101 -0.017
Distribution of return on assets (RoA )
![Page 22: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/22.jpg)
Quantification of the “Indirect” Effect of Learning on R&D• Sensitivity of R&D to coverage (analyst shock):
– Δln(coverage) = -0.087 x AN- ; Δln(rd) = -0.025 x AN-
Δln(rd)/Δln(coverage) = -2.5%/-8.7% = 28.7%
Δln(rd) = 28.7% x Δln(coverage)
• Indirect effect of tax credit (R&D shock):
– Δln(coverage) = 0.052 x TC+
Indirect effect of TC, operating through analysts’ response: Δln(rd)* = 28.7% x 5.2% = 1.5%
– Total effect of tax credit : Δln(rd) = 0.045 x TC+
– Compare indirect effect to total effect of TC+:
Indirect effect = 1.5%/4.5% = 33.3% of total effect of tax credit
22Firm Innovation and Financial Analysis
![Page 23: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/23.jpg)
Calibration
Firm Innovation and Financial Analysis 23
• Income speed of convergence:
• Calibrate the model to assess the importance of the parameter.
• Determine 4 parameters (α, β, εa, εq) to compute γ and its components.
![Page 24: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/24.jpg)
Calibration
Firm Innovation and Financial Analysis 24
• α measures how profits are shared between firms:
– α=1 to generate the most skewed distribution of profits.
• εa and εq are derived from ea and eq as estimated in our reduced-form regressions:
– Assume that the economy is initially in steady state and that it is perturbed by a rescaling shock (changes in R&D tax credits or in broker closures) during period T.
– The perturbed economy then converges toward a new steady state.
– Use the model to compute the change in the learning and research efforts from period T to the next, T + 1.
• β measures share of capital in total income: A range of values in [1/3, 2/3].
• Result: Interaction’s contribution to income growth represents a third of the total contributions of learning and R&D. 1/3
![Page 25: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/25.jpg)
Calibration
Firm Innovation and Financial Analysis 25
![Page 26: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/26.jpg)
Summary• A model of financial development and technological progress
• Knowledge about techs. and technological knowledge feed on each other
– Financiers are better informed about inventions⇒ Inventors expect to receive more funding if successful⇒ They innovate more
– Conversely, inventors innovate more⇒ Financiers anticipate a higher return on their capital⇒ They collect more information about inventions
• Qualitatively: Effect supported by the combination of two “experiments”
• Magnitude: Indirect effect of R&D policy change, operating through analysts’ response, is about 1/3 of the size of its total effect
26Firm Innovation and Financial Analysis
![Page 27: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/27.jpg)
APPENDIX
27Firm Innovation and Financial Analysis
![Page 28: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/28.jpg)
Stylized Facts Motivating the Model
• Fin. dev. stimulates investments in R&D, R&D contributes to TFP, and TFP contributes to economic growth (Carlin & Mayer (2003), Griliches (1988))
• Fin. dev. also enhances TFP by improving capital efficiency
– Countries with more developed financial sectors allocate capital more efficiently (Wurgler (2000), Bertrand et al. (2005), Galindo et al. (2005), Chari & Henry (2006))
– A more efficient distribution of capital at the micro level translates into higher TFP (Jeong & Townsend (2006), Restuccia & Rogerson (2003) and Hsieh & Klenow (2006))
• Fin. dev. improves capital efficiency by alleviating informational frictions (Rajan & Zingales
(1998), Wurgler (2000), Carlin & Mayer (2003))
• Countries that are sufficiently developed tend to specialize and the degree of specialization is positively related to fin. dev. (Imbs & Wacziarg (2003), Kalemli-Ozcan, Sorensen &
Yosha (2003))
28Firm Innovation and Financial Analysis
![Page 29: Firm Innovation and Financial Analysis: How Do They Interact?cepr.org/sites/default/files/Peress, Joel pdf.pdf · 2016. 12. 13. · Overview • A model of financial development and](https://reader035.vdocuments.us/reader035/viewer/2022071405/60fa261773d09707eb76819c/html5/thumbnails/29.jpg)
Related Literature • Finance & growth theory shows how frictions limit the efficient use of resources, e.g.:
– Incomplete information (Greenwood & Jovanovic (1990) )
– Project indivisibilities (Acemoglu & Zilibotti (1997))
– Moral hazard (Bhattacharya & Chiesa (1995), De la Fuente & Marin (1996), Acemoglu et al. (2004))
This paper:
– Focus on selection (ex ante info) rather than monitoring (ex post info) – Anticipation that capital will be efficiently allocated encourages innovation
• Empirical literature on finance and innovation
– Effect of finance on innovation (Derrien and Kecskes (2013), Amore et al. (2013), Hombert and Matray (2014))
This paper:
– Empirically evaluate the interplay between R&D and financial analysis29Firm Innovation and Financial Analysis