Essays in Corporate Finance and Corporate Innovation
In the first chapter I investigate whether firms grant stock options to rank-and-file employees (RFOs) for retention purposes. I find that it depends on their level of investment in intellectual property. Firms grant more RFOs if they have more knowledge capital, more patents awarded, more citations received by these patents, and more patents for “breakthrough” innovations. After the risk of poaching by rival firms is diminished by the adoption of the Inevitable Disclosure Doctrine, I find that firms with above median level of knowledge capital reduce their RFO grants by 32% relative to control firms; the reduction is minimal for firms with below median level of knowledge capital. In the second chapter I investigate how effective are RFO grants in retaining employees. Previous studies find that while there is an initial reduction in employee turnover, the effect is temporary and quickly reversed within three years of the grant. In this chapter, I show that the impact of RFOs is permanent. I find that there is a 36% reduction in inventor turnover in the year of grant and the impact remains over the next three years. Importantly, there is no reversal suggesting that the benefit is permanent instead of transitory. I also find that the importance of RFOs to reduce inventor turnover increases following the implementation of FAS123R when firms reduce the use of RFO. In the final chapter I study the behavior of firms with respect to their patent applications. I find that firms engage in window dressing by timing the date of their patent applications. I find that almost 40% of firms’ yearly patents are filed in the last quarter of the calendar year accompanied by a reduction in the quality of these patents. The behavior is more prevalent among firms subject to lower external and internal monitoring, supporting the incentive to window dress as the underlying channel. To establish window dressing as the key mechanism, I use the adoption of America Invents Act as a quasi-natural experiment that has increased the costs of window dressing. Following the adoption of the Act, the window dressing behavior become less prevalent.
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