Innovation-Related Diversification and Firm Value


  • The authors thank John Doukas (Editor), three anonymous referees, as well as Kai Li, Peter Thompson and Yoram Barzel for helpful comments. The authors also thank participants of the EFMA Conference 2014 in Rome, Academy of Management Annual Meeting 2014 in Philadelphia and Paris Financial Management Conference 2013 for helpful discussions. Sheng Xiao gratefully acknowledges financial support from the University of Minnesota's single-semester leave fund, Westminster College's Gore course release fund and Naomi Fallentine Weyher Endowment. Zhao Rong gratefully acknowledges financial support from Florida International University Dissertation Year Fellowship.


We examine a novel determinant of corporate diversification and its valuation effect: corporate innovations. We find consistent evidence that corporate innovations increase the extent of diversification. To establish causality, we estimate the firm fixed effects, 2SLS and GMM models. The 2SLS model uses the US state-level R&D tax credits as an instrumental variable for corporate innovations. We also find that a firm is more likely to diversify into an industry where it has more applicable innovations. Further, such innovation-related diversification is associated with significantly higher firm value. Our results are robust to various measures of corporate innovations.