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Innovation Strategy of Private Firms

  • Huasheng Gao, Po-Hsuan Hsu and Kai Li

We compare innovation strategies of public and private firms based on a large sample over the period 1997–2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.

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Corresponding author
* Gao (corresponding author),, Fudan University Fanhai International School of Finance; Hsu,, University of Hong Kong Faculty of Business and Economics; and Li,, University of British Columbia Sauder School of Business.
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We are grateful for helpful comments from an anonymous referee, Andres Almazan, Julian Atanassov, Jan Bena, Thomas Chemmanur, Guoli Chen, Bill Kerr, Tomislav Ladika, Alexander Ljunqgvist, Paul Malatesta (the editor), Gustavo Manso, Ron Masulis, Hernan Ortiz-Molina, Neslihan Ozkan, Ivan Png, Jay Ritter, Morten Sorensen, Xuan Tian, Cheng-Wei Wu, Ting Xu, Yu Yuan, Alminas Žaldokas, seminar participants at Boston University, Harvard Business School, Nanyang Technological University, National Chengchi University, Shanghai Advanced Institute of Finance, Shanghai University of Finance and Economics, University of Bristol, University of British Columbia, University of Exeter, University of Hong Kong, University of International Business and Economics, University of Oklahoma, and conference participants at the 2013 Conference on the Theories and Practices of Securities and Financial Markets, the 2014 Financial Management Association Asia Pacific Conference, the 2014 International Conference on Corporate Finance and Financial Markets, and the 2014 China International Conference in Finance. We acknowledge the effort of our research assistants Rita Lei Chen, Yi Du, Cherry Guo, Jialing Hu, Yunan Liu, and Chi-Yang Tsou. Hsu acknowledges the support from the General Research Fund sponsored by the Research Grants Council in Hong Kong (Ref. 17500015). Li acknowledges financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC Grant Number: 435-2013-0023). All errors are our own.

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