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Innovate to Survive: The Effect of Technology Competition on Corporate Bankruptcy


  • We thank Bill Christie (Editor), an anonymous referee, Jerry Cao, Dhammika Dharmapala, Jin-Chuan Duan, Fangjian Fu, Chinmoy Ghosh, Carmelo Giaccotto, Charles M. Jones, Roger Loh, Wei-Ling Song, Krishnamurthy Subramanian, Jerome Taillard, Bernard Yeung, and seminar participants at the University of Connecticut, the National University of Singapore, the Singapore Management University, the 2009 NTU IEFA Conference, the FMA 2009 Annual Meeting, and the 2010 CICF Conference for valuable comments and suggestions.


This paper establishes a strong relation between technology competition and corporate bankruptcy. Using detailed firm-level patent data, we show that: 1) the capability of firms to innovate predicts future bankruptcies better than the typical measures such as Z-score and credit rating, 2) technology-related bankruptcies are less sensitive to the business cycle and industry success, and 3) firms that go bankrupt as a result of technology competition experience larger declines in earnings and stock prices.