The Diffusion of Deal Innovations in Complex Contractual Networks

We introduce a new method for studying contractual evolution in complex markets. We situate the diffusion of a deal innovation within an advisory network and then provide methods for inferring a law firm's preference for adopting the innovation and for calculating each firm's proximity to prior adopters. This allows for granular analysis of firm‐to‐firm interactions as a diffusion mechanism. To demonstrate, we study the top‐up option's diffusion in two‐step tender offers from 1999 to 2013. Diffusion occurs in 40% of observations in which a non‐adopting firm is directly connected to a prior adopter of the option. By contrast, diffusion occurs in only 4% of observations without a direct connection to a prior adopter. We find this relationship persists in even the most comprehensive regression analysis, finding that directly connected firms have a hazard of adoption that is 4.01 times that of firms with no direct connection, even after controlling for deal, firm, and industry characteristics. These results demonstrate the importance of firm‐to‐firm information transfers to contractual evolution and underscore their study as a research priority.