Monday, August 5, 2013

Entrepreneurial Exits and Innovation

AGGARWAL Vikas A., HSU David H.
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Management Science 60, 4 (2014) 867-887

We examine how IPOs and acquisitions affect entrepreneurial innovation as measured by patent counts and forward patent citations. We construct a firm-year panel dataset of all venture capital-backed biotechnology firms founded between 1980-2000, tracked yearly through 2006. We address the possibility of unobserved self-selection into exit mode by using coarsened exact matching (CEM), and in two additional ways: (1) comparing firms that filed for an IPO (or announced a merger) with those not completing the transaction for reasons unrelated to innovation, and (2) using an instrumental variables approach. We find that innovation quality is highest under private ownership and lowest under public ownership, with acquisition intermediate between the two. Together with a set of within-exit mode analyses, these results are consistent with the proposition that information confidentiality mechanisms shape innovation outcomes. The results are not explained by inventor-level turnover following exit events or by firms’ pre-exit window dressing behavior.