Scheduled: Kolade OKE

Jury

Abstract

Innovation occupies a paradoxical position in corporate finance: universally recognized as the primary driver of long-term growth, yet the very firms that generate it—those with intangible assets that are difficult to use as collateral and uncertain future returns—present some of the most persistent unresolved problems in financial economics. This dissertation investigates how this tension plays out at three stages of an innovative firm’s financing lifecycle: the initial R&D financing decision, the market’s subsequent pricing of firms once their innovation becomes observable, and the contractual terms firms negotiate when they turn to hybrid securities. Each stage is the subject of one of the dissertation’s three papers, using evidence from the United States, Europe, and Korea. Paper 1 examines whether innovation reduces leverage and how this varies with the institutional and macroeconomic environment. Using a panel of U.S. and European firms, it finds that patent intensity is negatively and significantly associated with both market and book leverage, a finding that holds up under instrumental-variable estimation. Citation-based innovation quality is priced asymmetrically, affecting market leverage in the U.S. but not in Europe, and book leverage in both regions—more strongly in Europe. The relationship between innovation and leverage also weakens significantly during periods of GDP growth. Paper 2 examines whether the market rewards innovation intensity linearly and finds that it does not. Sorting firms into six portfolios based on patent density reveals an inverted-U relationship between innovation intensity and abnormal returns: mean returns and Fama-French three-factor alphas rise from the lowest to a high-but-not-extreme portfolio, then decline at the highest innovation intensities. This premium decays from a Sharpe ratio of 0.24 at one year to a level indistinguishable from zero by three years, consistent with gradual price incorporation rather than a compensated risk factor. Chow tests reject homogeneity between U.S. and European portfolios, a divergence attributed to an Innovation Efficiency Ratio showing that U.S. firms convert R&D spending into patented output roughly 3.5 times more efficiently than European firms. Paper 3 examines the convertible bond market in Korea—one of the world’s most active markets for small- and mid-cap innovative issuers—and investigates how R&D intensity is priced into the conversion premium. Consistent with the risk-uncertainty theory of Brennan and Kraus, R&D intensity is positively and significantly associated with the conversion premium, and this relationship is concentrated among unprofitable issuers and high-technology firms, where risk is hardest to assess. Robustness checks rule out a mechanical option-pricing explanation. The relationship does not hold up under a within-firm fixed-effects test, indicating persistent, firm-level differences in risk opacity rather than a mechanical year-to-year response. Taken together, the three papers form a single narrative, and their unifying contribution is a distinction between two forms of information asymmetry that prior literature has often conflated: asymmetry regarding a firm’s expected value, and asymmetry regarding the uncertainty surrounding that value—its risk. The latter—developed by Brennan and Kraus for convertible bonds and by Halov and Heider for capital structure—is shown here to be the more relevant friction throughout an innovative firm’s financing lifecycle: it pushes innovative firms toward equity at the point of initial financing (Paper 1), is only partially resolved once these firms are priced by public markets (Paper 2), and is directly renegotiated into contract terms where institutions permit firm-specific bargaining (Paper 3). A second principle emerges across all three papers: the financial consequences of innovation are jointly determined by the nature of these firms and by the institutional architecture—whether market-based or bank-based, centralized or bilaterally negotiated—of the markets in which they raise capital, are priced, and enter into contracts.