Shai Bernstein, Business Economics PhD
Thesis Co-chairs: Andrei Shleifer and Jeremy Stein
Dissertation Title: Essays in Financial Economics
Job Market Paper: Does Going Public Affect Innovation?
Young, innovative firms greatly rely on public equity markets to finance their R&D investments. Does the transition to public equity markets affect their innovative activities? By alleviating financial constraints, initial public offerings (IPOs) may allow firms to enhance innovation. However, changes in managerial and inventor incentives may lead firms to pursue more conventional projects. Using a novel dataset, I find that going public causes a decline in innovation. I estimate this effect using withdrawn IPO filings to compare the long-run innovation of firms that went public with private firms at a similar stage in their life cycles. To overcome the endogeneity of IPO withdrawals, I use two-month NASDAQ fluctuations during the initial part of the book-building phase. This source of exogenous variation affects IPO completion, but unlikely to affect long-run innovation. Using standard patent-based metrics, I find that going public leads to a decline in innovation novelty by approximately 50% relative to firms that remained private. This can be explained by additional findings that skilled inventors are more likely to leave and the productivity of remaining inventors decreases. Access to equity markets allow firms to mitigate the decline in internal innovation by attracting human capital and buying external innovations through mergers and acquisitions. I argue that changes in firm governance and particularly managerial incentives play an important role in explaining the results.
