Innovation-Related Diversification and Firm Value

Abstract

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.