Friday, January 18, 2013

Does going public stifle innovation?

Stanford Professor Shai Bernstein has conducted a new study on the rate of innovation at firms who issue an initial public offering.   According to Bernstein, "Using patent-based metrics, I find that the
quality of internal innovation declines following the IPO, and firms experience both an exodus of skilled inventors and a decline in productivity of remaining inventors."    Specifically, he found a "substantial decline of approximately 40 percent in innovation novelty as measured by patent citations."  Note that he didn't find the overall number of patents decreasing for these firms, just the level of breakthrough developments.  Bernstein also finds that post-IPO firms tend to shift toward acquisitions to drive innovation.  In the five years after an initial public offering, roughly 1/3 of the patents tend to come from acquisitions.  Finally, he finds a much smaller (and not statistically significant) decline in innovation novelty at those firms whose CEO also serves as Chairman (as compared to companies who have split the Chairman/CEO positions).  What explains that finding?  Bernstein hypothesizes that the CEO who also serves as Chairman is more "entrenched" and less susceptible to short-term profit pressures from Wall Street.  Therefore, he or she may be able to invest more freely in research and development that may have a low probability of succeeding, but could lead to a breakthrough innovation. 

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