Essays in innovation and regulation

Torin Mats McFarland

doi:10.17918/00010970

My dissertation is composed of three essays, which examine the impact of regulation on innovation and the market for corporate control. Prior literature demonstrates the economic significance of innovation and corporate control, and so frictions in these markets have large direct and indirect ramifications. My first essay, solo-authored, examines how regulatory burden disrupts the careers of productive inventors. Using structural topic modeling and the text of paperwork regulations, I develop a time-varying inventor-specific measure of regulatory burden. I show that inventors facing high burden exhibit decreased productivity and lower quality innovations. A 1 standard deviation increase in time spent on compliance decreases patenting by 5.4% and decreases citations accrued by 5.1%. These results are stronger in Star Inventors. In labor markets, I find evidence consistent with a disutility channel: after experiencing increases in burden, inventors are more likely to change jobs and seek lower burden technology areas. My second essay deepens our understanding of how social ties propagate the effects of stricter non-compete agreement (NCA) enforcement across geographic boundaries. While existing studies emphasize negative local impacts of strengthened NCA enforcement, such as decreased labor mobility, reduced wages, and lower innovation output, we explore interstate spillover effects facilitated by inventors' social networks. Using inventor-level data and the Social Connectedness Index developed from Facebook friendship links, we demonstrate that inventors respond to tighter NCA policies by relocating to distant counties where they have strong social ties. Moreover, we find that out-of-state regions with high social proximity to inventors from states with strengthened NCA enforcement experience a 7% growth in both inventor populations and innovation output, measured by increased patent counts and citations. These spillover benefits particularly accrue to young and private firms and result in increased entrepreneurial activity, as measured by new firm formation and venture capital funding. Combined, these findings are consistent with social ties alleviating informational frictions and enhancing labor market matching efficiency. Overall, our findings highlight the importance of social ties in generating cross-regional spillovers when implementing labor mobility policies. My final essay studies how disclosure requirements influence the market for corporate control. We develop and empirically test a model of asymmetric information in merger processes. We find that US-listed firms with reduced financial reporting ("non-accelerated filers'' and "smaller reporting companies'') are 20% less likely to become takeover targets, compared with other firms. This result holds across several empirical specifications, including regression discontinuity analyses (around the public float cutoff to qualify for reduced reporting). Reduced-reporting firms are sold for less cash but receive higher premiums than other targets. We find no evidence (using both stock market and accounting performance metrics) that their acquirers are worse off than other acquirers. Consistent with the rationale that financial reporting alleviates asymmetric information, reduced-reporting firms are targeted later in merger waves relative to their industry peers and subject to a permanent stock price revaluation when M&A deals fail.

Essays in innovation and regulation

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Essays in innovation and regulation

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