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The Impact of Financial Innovation on Firm Stability

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  • Fabian Kuehnhausen
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    Abstract

    In this paper, I evaluate the impact of competition on firm stability between financial agents who are able to invest in innovations to reap profits. Given a vast array of concerns and interconnections between financial innovations, financial distress of firms and financial crises provided by theoretical assessments, I analyze empirically the causal link between a financial agents' innovativeness and stability. Using a unique data set on financial innovations in the USA between 1990 and 2002, I can show that a larger degree of innovation negatively affects firm stability safe for the underlying firm characteristics. The results are robust against different modifications of innovation measures and against different fragility parameters indicating profitability, activity risk and risk of insolvency.

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    Bibliographic Info

    Article provided by Research and Business Development Department, Borsa Istanbul in its journal BIFEC Book of Abstracts & Proceedings.

    Volume (Year): 1 (2014)
    Issue (Month): 2 (March)
    Pages: 211-239

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    Handle: RePEc:bor:bifeca:v:1:y:2014:i:2:p:211-239

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    Related research

    Keywords: Incentives to innovate; Financial Innovation; Fragilit;

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    References

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    1. Josh Lerner & Peter Tufano, 2011. "The Consequences of Financial Innovation: A Counterfactual Research Agenda," NBER Chapters, in: The Rate and Direction of Inventive Activity Revisited, pages 523-575 National Bureau of Economic Research, Inc.
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    3. Franklin Allen & Ana Babus & Elena Carletti, 2009. "Financial Crises: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 97-116, November.
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    5. W. Scott Frame & Lawrence White, 2002. "Empirical Studies of Financial Innovation: Lots of Talk, Little Action?," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 02-18, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. Stelios Michalopoulos & Luc Lueven & Ross Levine, 2010. "Financial Innovation and Endogenous Growth," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 0746, Department of Economics, Tufts University.
    7. Merton H. Miller, 1992. "Financial Innovation: Achievements And Prospects," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 4(4), pages 4-11.
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    11. Emine Boz & Enrique G. Mendoza, 2010. "Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis," NBER Working Papers 16020, National Bureau of Economic Research, Inc.
    12. Bhattacharyya, Sugato & Nanda, Vikram, 2000. "Client Discretion, Switching Costs, and Financial Innovation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 13(4), pages 1101-27.
    13. Andrei Shleifer & Robert W. Vishny, 2009. "Unstable Banking," NBER Working Papers 14943, National Bureau of Economic Research, Inc.
    14. Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert, 2012. "Neglected risks, financial innovation, and financial fragility," Journal of Financial Economics, Elsevier, Elsevier, vol. 104(3), pages 452-468.
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    17. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(2), pages 213-240, December.
    18. Thakor, Anjan V., 2012. "Incentives to innovate and financial crises," Journal of Financial Economics, Elsevier, Elsevier, vol. 103(1), pages 130-148.
    19. Laetitia Lepetit & Frank Strobel, 2012. "Bank equity Involvement in Industrial Firms and Bank Risk," Working Papers hal-00916709, HAL.
    20. Henderson, Brian J. & Pearson, Neil D., 2011. "The dark side of financial innovation: A case study of the pricing of a retail financial product," Journal of Financial Economics, Elsevier, Elsevier, vol. 100(2), pages 227-247, May.
    21. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 453-486.
    22. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    23. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    24. Andrés Carvajal & Marzena Rostek & Marek Weretka, 2012. "Competition in Financial Innovation," Econometrica, Econometric Society, Econometric Society, vol. 80(5), pages 1895-1936, 09.
    25. Josh Lerner & Peter Tufano, 2011. "The Consequences of Financial Innovation: A Counterfactual Research Agenda," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 41-85, December.
    26. Lerner, Josh, 2006. "The new new financial thing: The origins of financial innovations," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(2), pages 223-255, February.
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