Essays In Corporate Finance

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Doctor of Philosophy (PhD)
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Finance and Financial Management
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This dissertation studies two questions in corporate finance: 1) Does knowledge sharing affect innovation? and 2) How do profit sharing and loss sharing affect the choice of underwriting fees and offer prices in the IPO market? In the first chapter, I investigate the impact of knowledge sharing on innovation using the staggered adoption of the Uniform Trade Secrets Act as a plausibly exogenous source of variation in inter-firm information flow. I find that innovation becomes less efficient when information is more fragmented. To overcome the problem of limited informal knowledge exchange, companies are more likely to acquire technology in strategic alliances or through merger and acquisitions. I argue that the decrease in innovation is unlikely to be a result of substitution from patenting to ``padlocking" by showing that when information flow is more restricted in a state, the innovation level of companies in that state is not affected; but that of the competitors of firms in that state declines. In the second chapter, we model share flotation, starting with the standard contract that assigns all profits above the offer price to investors, and all losses below to the underwriter. We then add profit and loss sharing to the model, and allow the issuer to set the fee and the underwriter to set the price in the initial public offerings market. However, participants deviate in practice, such that investors share some of their profits, and some of the underwriter's losses. We find that profit sharing transfers wealth from issuers to underwriters without affecting the offer price, whereas loss sharing makes both the issuer and underwriter better off, while increasing the offer price. Empirical estimation indicates minimal profit sharing but substantial loss sharing.

David Musto
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