Finance and Corporate Innovation: A Survey

• Author: Xuan Tian,Jie (Jack) He
• Date: 01 April 2018
• DOI: http://doi.org/10.1111/ajfs.12208
• Published date: 01 April 2018

Finance and Corporate Innovation: A

Survey*

Jie (Jack) He

Terry College of Business, University of Georgia, United States

Xuan Tian**

PBC School of Finance, Tsinghua University, China

Received 20 December 2017; Accepted 5 January 2018

Abstract

Corporate innovation is an increasingly important topic that has attracted great attention

from academic researchers in financial economics in recent years. Although the top three

finance journals (i.e. the Journal of Finance, the Journal of Financial Economics, and the

Review of Financial Studies) together published a total of only five papers on corporate inno-

vation from 2000 to 2008, the number of such papers published by these three journals sky-

rocketed to 56 from 2009 to the third quarter of 2017. The purpose of this survey is to

provide a synthetic and evaluative monograph of academic papers that examine the drivers

and financing sources of corporate innovation.

Keywords Corporate innovation; Finance; Survey; Patents; Citations; R&D

JEL Classification: G10, G30, G31, G32, G34

1. Introduction

This article aims to review the recent, fast-growing literature on finance and cor-

porate innovation. It addresses the following questions: How is corporate finance

motivated and financed? To what extent do financial markets and systems shape

the initiation, process, features, and outcomes of technological innovation by

*The authors are grateful for helpful comments from James Brown, Thomas Chemmanur,

Florian Ederer, Paolo Fulghieri, David Hirshleifer, William Mann, Ramana Nanda, Gustavo

Manso, and Zhaoxia Xu. They thank Qingyang Meng, Wei Wei, Yuanchen Yang, Hailong

Zhao, and Ying Zhao for their excellent research assistance. Tian acknowledges financial sup-

port from the National Natural Science Foundation of China (Grant No. 71790591) and

Tsinghua University Research Grant (Grant No. 20151080451). All errors and omissions are

the responsibility of the authors.

**Corresponding author: PBC School of Finance, Tsinghua University, 43 Chengfu Road,

Beijing 100083, China. Tel: +86-10-6279-4103, Fax:+86-10-6279-5175, email: tianx@pbcsf.

tsinghua.edu.cn

Asia-Pacific Journal of Financial Studies (2018) 47, 165–212 doi:10.1111/ajfs.12208

©2018 Korean Securities Association 165

corporations? These questions are particularly important to investors, business

practitioners, social scientists, policy makers, and the like due to the fact that

technological innovation is vital for a country’s economic growth (Schumpeter,

1911; Solow, 1957; Romer, 1986) and a firm’s long-term competitive advantage

(Porter, 1992). According to a report issued by the OECD (2015), innovation

(including technological progress embodied in physical capital, investment in

knowledge-based capital, increased multi-factor productivity growth, and creative

destruction) accounts for approximately 50% of a country’s total GDP growth,

with influences varying depending on the country’s level of economic develop-

ment and the phase of its economic cycle. Economists have estimated that 85%

of a nation’s economic growth is attributable to technological innovation

(Rosenberg, 2004). Chang et al. (2016) document that a one-standard deviation

increase in patent stock per capital is associated with a 0.85% increase in GDP

growth. Given the important roles played by technological innovation, more and

more financial economists have started exploring a wide spectrum of firm-, mar-

ket-, and country-level determinants of corporate innovation over the past few

decades. The purpose of this survey is to provide a synthetic and evaluative

monograph of academic research that examines the drivers and financing of cor-

porate innovation. By doing so, we hope readers can obtain a comprehensive

perspective on the recent development of this line of research, understand the

differences and interconnectedness among various topics, and have a better clue

as to the direction of future research.

In recent years, corporate innovation has become an increasingly important

topic that has attracted tremendous attention and research effort from aca-

demic researchers in all kinds of disciplines including finance, economics,

accounting, marketing, management, and so on. This is especially true in the

last decade, largely because of the availability of high-quality patent and cita-

tion data that capture a country’s or a firm’s innovation output.

1

To obtain a

clear idea of the growth of the finance and innovation literature, we searched

“innovation” in the titles, abstracts, and key words of academic papers that

were published in the top six accounting and finance journals listed on the

University of Texas at Dallas’ “The UTD Top 100 Business School Research

Rankings” website (i.e. the Journal of Finance (JF), the Journal of Financial Eco-

nomics (JFE), the Review of Financial Studies (RFS), the Accounting Review

(TAR), the Journal of Accounting and Economics (JAE), and the Journal of

Accounting Research (JAR)).

2

We read these papers to ensure that they were

indeed about corporate innovation and then named them “innovation

1

Before that, the majority of academic studies on innovation rely on a firm’s voluntarily

reported research and development (R&D) expenses to infer about its innovation input,

which has several limitations, to be discussed in detail later in the survey.

2

The website is http://jindal.utdallas.edu/the-utd-top-100-business-school-research-rankings/

J. He and X. Tian

166 ©2018 Korean Securities Association

publications.” We found that there were a total of 68 innovation publications

between 2000 and the third quarter (Q3) of 2017.

3

Figure 1 shows the distribution of the innovation publications across these six

journals. Finance journals publish far more papers on corporate innovation than

accounting journals (i.e. 61 papers versus seven papers). Of the finance journals,

the JFE publishes about half of such papers (i.e. 31) followed by the RFS (18) and

the JF (12). Innovation publications are evenly distributed across the three account-

ing journals.

Regarding the time-series distribution of innovation publications in these six

journals, Figure 2 shows a fast-growing trend in the number of published papers on

corporate innovation in recent years. If we split the sample into two time periods,

we find that there is a total of only nine such papers published in these top

accounting and finance journals between 2000 and 2008. This number, however,

Figure 1 Distribution of innovation publications across top accounting and finance journals

between 2000 and 2017Q3

Figure 2 Time-series distribution of innovation publications between 2000 and 2017Q3

3

Note that this survey is written in the October of 2017. Hence, our sample ends in Septem-

ber, 2017.

Finance and Innovation: A Survey

©2018 Korean Securities Association 167