The impact of bankruptcy on competitors' innovations

Abstract

While prior studies have paid considerable attention to how competitors of the bankrupt firm are affected by stakeholders' negative perception, little is known about how bankruptcy influences competitors' innovation over time. In this study, we build on threat-rigidity theory to examine how competitors behavioral response to bankruptcy events leads to lower innovation performance. We also examine when the bankruptcy effect on competitors innovation is more/less pronounced. We study U.S. public firms between 1996 and 2000 and we employ differences-in-differences approach (DiD). We find that competitors innovation decreases in the post-bankruptcy period, as suggested by threat-rigidity theory. We also find that the negative effect of bankruptcy on innovations is more pronounced when competitors size is larger.