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Does Innovation Relieve Corporate Financial Distress?

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  • Keming Li

    (Texas A&M University-San Antonio)

Abstract

This paper examines whether innovation ability improves corporate performance of financially distressed firms. I begin by providing direct evidence that innovative firms in financial distress have significantly better future operating performance. To identify the causal effect, I study an exogenous shock—State Street Bank and Trust Company v. Signature Financial Group, Inc.—and find that an increase in innovation ability causes an improvement in future performance of distressed firms. Financial markets tend to pay more attention to innovative distressed firms, but these firms do not earn abnormal equity returns than their counterparts. I document that average investors hold pessimistic perspectives on distressed firms with innovation ability. In contrast, institutional investors have contrarian beliefs on distressed firms with innovation ability and hold more shares in these firms.

Suggested Citation

  • Keming Li, 2025. "Does Innovation Relieve Corporate Financial Distress?," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 32(1), pages 41-76, March.
  • Handle: RePEc:kap:apfinm:v:32:y:2025:i:1:d:10.1007_s10690-023-09445-4
    DOI: 10.1007/s10690-023-09445-4
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    More about this item

    Keywords

    Financial Distress; Innovation Ability; Corporate Performance; Overreaction;
    All these keywords.

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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