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Making Waves: To Innovate or Be a Fast Second?

Published online by Cambridge University Press:  10 June 2016

Chris Yung
Chris Yung*
Affiliation:
chris.yung@virginia.edu, University of Virginia, McIntire School of Commerce, Charlottesville, VA 22904.
*
*Corresponding author: chris.yung@virginia.edu
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Abstract

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Internal finance leads to a stalemate in innovation games; each firm wants to free-ride on the others’ costly experimentation. When instead innovation is financed externally (e.g., with venture capital or initial public offerings), there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimistic information. I characterize the relative sizes of waves of leaders and followers in innovation cycles, and the endogenous, intertemporal distribution of quality as each wave builds and crashes. Finally, old waves leave an adverse selection “hangover,” such that too much early innovation can cause the market for future innovation to break down.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 415 - 433
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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