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Brown bag seminar - Katarina Warg, (SHoF/SSE), The Acquisition Option and Startup Innovations

Katarina Warg, Swedish House of Finance at the Stockholm School of Economics

Job Market Paper Presentation.

Here is the abstract:

I study an important channel through which the increased prevalence of acquisitions of young firms affects productivity and economic growth; how changes in the relative attractiveness of different exit modes shift startup firms’ innovation incentives and causes firms to adjust their innovation strategy towards less independent innovations. I develop a theoretical framework to outline how the relative supply of venture capital and the attractiveness of acquisition markets shift the firms’ incentives to cater to potential acquirers. An increase in relative capital supply increases a firm’s incentives to stay independent and to introduce less complementary innovations. Using innovation measures based on trademark and patent text I can study the direction of a startup firm’s innovation activities and their level of independence from existing assets of incumbent firms. I show that firms are more likely to innovate in directions where acquisition activity is higher, suggesting that catering motives are an important determinant for the direction of a startup firms’ innovation strategy. Using a plausibly exogenous change in relative capital supply I show that firms introduce more independent innovations as the relative attractiveness of staying independent increase.

Dept. of Finance

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