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CFE-7: Law and Finance
Anti-Collusion Enforcement: Justice for Consumers and Equity for Firms
1Hong Kong University of Science and Technology; 2Lancaster University
We consider the case of changing competition that comes from stronger antitrust enforcement around the world to show that as the equilibrium switches from collusion to oligopolistic competition, firms respond by stepping up equity issuance and increasing investment. As a result, debt ratios fall. These results imply the importance of financial flexibility in surviving competitive threats. Our identification relies on difference-in-difference estimation based on a staggered passage of leniency laws in 63 countries around the world over 1990-2012.
Roadblock to Innovation: The Role of Patent Litigation in Corporate R&D
The recent spike in patent litigation raises concerns about the ability of the current intellectual property system to effectively promote innovation. Using a difference-in-difference design around the 2006 Supreme Court decision "eBay vs. MercExchange," I examine how patent enforcement can reduce the negative effects of litigation on firms’ innovation. This ruling was intended to curb abusive patent lawsuits by providing more flexibility in the way courts remedy patent violations. I estimate the causal impact of the decision by comparing firms that were differentially affected by the shock, measured by exogenous firm-level exposure to patent litigation before 2006. Across a large sample of innovative firms, the decision led to an increase in the quality and quantity of patenting and, for public firms, in R&D investment. In terms of channels, I show that patent litigation reduces investment in innovation by lowering the returns from R&D and by exacerbating financing constraints. This result confirms that patent litigation plays an important role in hindering innovation, and more generally that legal risk has real impact on firms' activity.
Shareholder Litigation and Corporate Innovation
1University of Hong Kong; 2UC Berkeley
We examine how shareholder litigation shapes corporate innovation, exploiting the staggered adoption of the universal demand (UD) laws in 23 states from 1989 to 2005. These laws impose obstacles against shareholders filing derivative lawsuits thereby significantly reducing a firm’s litigation risk. Following the passage of the UD laws, firms have invested more in R&D, generated more patents that have a large number of citations, produced more patents based on new knowledge and more patents in new technological classes. Taken together, the evidence suggests that the external pressure imposed by shareholder litigation discourage managers from engaging in explorative innovative activities.
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Conference: EFA 2017
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