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Boom and Bust Patterns in the Adoption of Financial Innovations

Author

Listed:
  • Persons, John C
  • Warther, Vincent A

Abstract

We develop a dynamic model of the adoption of financial innovations. Each period, firms decide whether or not to adopt an innovation of uncertain value, and the profitability of each period's adoptions reveals information about the innovation's value. We show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are, in fact, consistent with fully rational behavior. We also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Persons, John C & Warther, Vincent A, 1997. "Boom and Bust Patterns in the Adoption of Financial Innovations," Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 939-967.
  • Handle: RePEc:oup:rfinst:v:10:y:1997:i:4:p:939-67
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    Citations

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    Cited by:

    1. Goldfarb, Brent & Kirsch, David & Miller, David A., 2007. "Was there too little entry during the Dot Com Era?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 100-144, October.
    2. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
    3. Alexander P. Ljungqvist & William J. Wilhelm, 1999. "The Seven Percent Solution? An International Perspective on Underwriting Spreads," OFRC Working Papers Series 1999fe11, Oxford Financial Research Centre.
    4. Biais, Bruno & Rochet, Jean-Charles & Woolley, Paul, 2013. "The dynamics of innovation and risk," TSE Working Papers 13-448, Toulouse School of Economics (TSE).
    5. Paul Povel & Rajdeep Singh & Andrew Winton, 2007. "Booms, Busts, and Fraud," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1219-1254.
    6. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    7. Benveniste, Lawrence M. & Busaba, Walid Y. & Wilhelm, William Jr., 2002. "Information Externalities and the Role of Underwriters in Primary Equity Markets," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 61-86, January.
    8. repec:spr:fininn:v:4:y:2018:i:1:d:10.1186_s40854-018-0088-y is not listed on IDEAS
    9. Josh Lerner, 2000. "Where Does State Street Lead? A First Look at Finance Patents, 1971-2000," NBER Working Papers 7918, National Bureau of Economic Research, Inc.
    10. Subadar Agathee, Ushad & Brooks, Chris & Sannassee, Raja Vinesh, 2012. "Hot and cold IPO markets: The case of the Stock Exchange of Mauritius," Journal of Multinational Financial Management, Elsevier, vol. 22(4), pages 168-192.
    11. Lawrence M. Benveniste & Alexander Ljungqvist & William J. Wilhelm & Xiaoyun Yu, 2003. "Evidence of Information Spillovers in the Production of Investment Banking Services," Journal of Finance, American Finance Association, vol. 58(2), pages 577-608, April.
    12. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66.
    13. Helios Herrera & Enrique Schroth, 2005. "Developer's Expertise and the Dynamics of Financial Innovation: Theory and Evidence," Working Papers 0504, Centro de Investigacion Economica, ITAM.
    14. Chemmanur, Thomas J. & Wilhelm, William Jr., 2002. "New Technologies, Financial Innovation, and Intermediation," Journal of Financial Intermediation, Elsevier, vol. 11(1), pages 2-8, January.
    15. Kaustia, Markku & Rantala, Ville, 2015. "Social learning and corporate peer effects," Journal of Financial Economics, Elsevier, vol. 117(3), pages 653-669.
    16. Herrera, Helios & Schroth, Enrique, 2011. "Advantageous innovation and imitation in the underwriting market for corporate securities," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1097-1113, May.
    17. Maxim Kotsemir & Alexander Abroskin & Dirk Meissner, 2013. "Innovation concepts and typology – an evolutionary discussion," HSE Working papers WP BRP 05/STI/2013, National Research University Higher School of Economics.
    18. Duchin, Ran & Schmidt, Breno, 2013. "Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions," Journal of Financial Economics, Elsevier, vol. 107(1), pages 69-88.
    19. Kaustia, Markku & Knüpfer, Samuli, 2012. "Peer performance and stock market entry," Journal of Financial Economics, Elsevier, vol. 104(2), pages 321-338.
    20. Martynova, M., 2006. "The market for corporate control and corporate governance regulation in Europe," Other publications TiSEM 8651e281-4914-41f2-ac14-1, Tilburg University, School of Economics and Management.
    21. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    22. Timothy Riddiough, 2001. "Intermediation, Standardization and Learning in Financial Markets: Some Evidence and Implications," Wisconsin-Madison CULER working papers 01-09, University of Wisconsin Center for Urban Land Economic Research.
    23. Steven Deller & Reka Sundaram-Stukel, 2012. "Spatial patterns in the location decisions of US credit unions," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 49(2), pages 417-445, October.
    24. repec:vls:rojfme:v:4:y:2017:i:1:p:275-279 is not listed on IDEAS
    25. Bharat N. Anand & Alexander Galetovic, 2002. "Does Competition Kill Relationships? Inside Investment Banking," Documentos de Trabajo 119, Centro de Economía Aplicada, Universidad de Chile.

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