Three essays on innovation and the impact of capital markets

Hart E Posen, University of Pennsylvania


The objective of this dissertation is to explore the consequences for firm innovation strategy of capital market selection. Prior research, employing a residual claims/agency theory lens, has focused on the implications of heterogeneity in information and incentives across the innovator-investor boundary. I pursue a complementary approach - taking a strategy theory lens that focuses attention on the role and consequences of heterogeneity in endowments and experience across firms. I use a combination of formal computational modeling and empirical methodologies across a set of three independent papers. The first paper builds on a central claim in the strategy literature - that inter-firm performance differences are the result of heterogeneity in economically valuable assets (capabilities) that are a product of historical investments and co-specialization, and as a consequence, are subject to market failure. In the context of the pharmaceutical industry, I examine the extent to which the capital market prices downstream drug commercialization capabilities when valuing a new drug. Results indicate that commercialization capabilities contribute on average $156 million to the capital market's valuation of a new drug. The second paper uses a computational model to explore how a firm's innovation strategy affects the outcome of capital market selection. I find a distinct trade-off between R&D strategies that enhance mean performance, and those that reduced uncertainty. Conditional on surviving capital market selection, the uncertainty reducing strategy exhibits higher mean performance than the mean enhancing strategy. The mechanism underlying this result is that firm R&D strategy choices affect both the time path of uncertainty resolution (speed and stability) and, as a consequence, the efficacy of capital market selection. The third paper tests the popular hypotheses that some venture capital backed firms receive 'too much' financing, 'too soon', and grow 'too fast' - and flounder as a consequence. I distinguish between residual claims/agency theory and capabilities theory explanations and test the theoretical predictions in a sample of venture capital backed biotechnology firms. Consistent with a capabilities theory explanation, I find evidence to support both the level and rate hypotheses.

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Recommended Citation

Posen, Hart E, "Three essays on innovation and the impact of capital markets" (2005). Dissertations available from ProQuest. AAI3197730.