Wednesday, April 18, 2012

AGGARWAL Vikas A., HSU David H.
Entrepreneurial Exits and Innovation
INSEAD Working Paper 2012/47/EFE/ACGRE

We examine how IPOs and M&As affect entrepreneurial innovation as measured by forward patent citations and product development. We construct a panel dataset of all venture capitalbacked biotechnology firms founded between 1980 and 2000, tracked yearly through 2006. We address the possibility of unobserved self-selection into exit mode in two ways: (1) we compare firms that filed for an IPO (or announced a merger) with those who did not complete the transaction for reasons unrelated to innovation, and (2) we use an instrumental variables approach based on relative financing channel liquidity at the industry level. We find evidence of a short-run positive IPO effect on innovation, with the effect reversing over a longer time window. Patent generality increases but originality decreases after an IPO. Innovation outcomes improve and are sustained for the acquisition exit channel. We conclude with inventor-level analyses to assess the importance of inventor turnover for these patterns.