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Innovation†Related Diversification and Firm Value

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  • Zhao Rong
  • Sheng Xiao

Abstract

We examine a novel determinant of corporate diversification and its valuation effect: corporate innovations. We find consistent evidence that corporate innovations increase the extent of diversification. To establish causality, we estimate the firm fixed effects, 2SLS and GMM models. The 2SLS model uses the US state†level R&D tax credits as an instrumental variable for corporate innovations. We also find that a firm is more likely to diversify into an industry where it has more applicable innovations. Further, such innovation†related diversification is associated with significantly higher firm value. Our results are robust to various measures of corporate innovations.

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  • Zhao Rong & Sheng Xiao, 2017. "Innovation†Related Diversification and Firm Value," European Financial Management, European Financial Management Association, vol. 23(3), pages 475-518, June.
    • Handle: RePEc:bla:eufman:v:23:y:2017:i:3:p:475-518
    DOI: 10.1111/eufm.12110
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    2. Yang, Ann Shawing & Okada, Hiromu, 2019. "Corporate innovations as institutional anomie: Patent activities and financial performance of the international aerospace industry," Finance Research Letters, Elsevier, vol. 28(C), pages 328-336.
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