Essays in Corporate Finance The Harvard community has made this article openly available

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Essays in Corporate Finance
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Mezzanotti, Filippo. 2016. Essays in Corporate Finance. Doctoral dissertation, Harvard
University, Graduate School of Arts & Sciences.
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Essays in Corporate Finance
A dissertation presented
by
Filippo Mezzanotti
to
The Committee for the PhD in Business Economics
in partial fulfillment of the requirements
for the degree of
Doctor of Philosophy
in the subject of
Business Economics
Harvard University
Cambridge, Massachusetts
April 2016
(cid:13)c 2016 Filippo Mezzanotti
All rights reserved.
Dissertation Advisors: Author:
Professor Josh Lerner Filippo Mezzanotti
Professor Jeremy Stein
Essays in Corporate Finance
Abstract
Macroeconomic and institutional shocks are important drivers of firms’ activities. In
chapterone, Iexaminetheroleofpatentlitigationinaffectingcompanies’innovation. Study-
ing a landmark Supreme Court decision, I show that an improvement in patent enforcement
positively affects the innovation activity of corporations. In chapter two, I study the role of
private equity in period of large financial turmoil. In the context of the 2008 crisis in United
Kingdom, I show that private equity backed companies experienced a lower decline in invest-
ment than a control group of similar companies that were not related to private equity. This
effect is explained by the ability of private equity to relax the financing constraints of the
portfolio companies when access to credit markets is limited. In chapter three, I explore the
role of sovereign securities held by banks in the propagation of a financial shock to the econ-
omy. Using detailed loan level data matching firms and banks in Italy, the paper finds that
the shock to banks’ sovereign portfolio caused by the Greek bailout (2010) was passed on to
firms through a contraction in credit. The effects of this shock were particularly disruptive
for smaller companies.
iii
Contents
Abstract iii
Acknowledgments xiii
Introduction 1
1. Roadblock to Innovation: The Role of Patent Litigation in Corporate R&D 3
1.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2. The “eBay vs. MercExchange” case . . . . . . . . . . . . . . . . . . . . . . . 11
1.2.1. The Supreme Court decision . . . . . . . . . . . . . . . . . . . . . . . 12
1.2.2. Injunction and innovation . . . . . . . . . . . . . . . . . . . . . . . . 16
1.2.3. The decision and non-practicing entities . . . . . . . . . . . . . . . . 17
1.3. Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.3.1. Firm level data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.3.2. Measuring exposure of litigation at firm level . . . . . . . . . . . . . . 23
1.4. The effect of the Supreme Court decision on innovation . . . . . . . . . . . . 28
1.4.1. Empirical framework . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.4.2. The effect of the decision on innovation output . . . . . . . . . . . . . 30
1.4.3. Identification assumptions . . . . . . . . . . . . . . . . . . . . . . . . 33
1.4.4. Robustness and other results . . . . . . . . . . . . . . . . . . . . . . . 38
iv
1.4.5. Timing of the effects . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.4.6. Evidence on patent quality . . . . . . . . . . . . . . . . . . . . . . . . 42
1.4.7. Evidence from public firms . . . . . . . . . . . . . . . . . . . . . . . . 45
1.5. How does litigation exposure affect innovation? . . . . . . . . . . . . . . . . 48
1.5.1. Litigation lowers innovation returns: evidence from the composition of
innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
1.5.2. Litigation exacerbates financial constraints . . . . . . . . . . . . . . . 51
1.6. Supreme Court decision and stock prices . . . . . . . . . . . . . . . . . . . . 57
1.7. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
2. Private Equity, Financial Strategy, and the Crisis1 62
2.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.2. Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.2.1. Sample construction . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2.2.2. Control group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
2.2.3. Other data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
2.3. Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
2.4. Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
2.4.1. Main Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
2.4.2. Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
2.4.3. Heterogeneity: investments and financial constraints . . . . . . . . . . 86
2.5. Performance Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
2.5.1. Change in performance . . . . . . . . . . . . . . . . . . . . . . . . . . 91
2.5.2. Exit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
2.6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
1Co-authored with Shai Bernstein and Josh Lerner.
v
3. Sovereign debt exposure and the bank lending channel: impact on credit
supply and the real economy2 99
3.1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
3.2. The onset of the sovereign crisis . . . . . . . . . . . . . . . . . . . . . . . . . 106
3.3. Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
3.4. The bank lending channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.4.1. Identification strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 114
3.4.2. The bank lending channel: main results and robustness . . . . . . . 118
3.5. Credit supply and corporate behavior . . . . . . . . . . . . . . . . . . . . . . 137
3.5.1. Supply shock and credit market’s access . . . . . . . . . . . . . . . . 139
3.5.2. Information frictions and market segmentation . . . . . . . . . . . . . 142
3.5.3. Real effects on investments and employment . . . . . . . . . . . . . . 144
3.6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Bibliography 151
A. Appendix to Chapter 1 160
A.1. Background information on “eBay versus MercExchange” . . . . . . . . . . . 160
A.2. The timing of the decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
A.3. Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
A.3.1. Samples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
A.3.2. Variables definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
A.3.3. Stock Market data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
A.4. Additional Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
A.5. Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
2Co-authored with Margherita Bottero and Simone Lenzu.
vi
B. Appendix to Chapter 2 182
B.1. Data and variable construction . . . . . . . . . . . . . . . . . . . . . . . . . 182
B.2. Additional Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
B.3. Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
C. Appendix Chapter 3 194
C.1. A Simple model of loan supply . . . . . . . . . . . . . . . . . . . . . . . . . . 194
C.2. Sovereign Holdings and Banks: A Cross-Country Comparison . . . . . . . . 195
C.3. Correlation Between Greek and Italian Sovereign Yields . . . . . . . . . . . . 198
C.4. Semi-parametric estimation of the bank lending channel . . . . . . . . . . . . 200
C.5. Estimates of effect of the sovereign crisis on aggregates bank credit via the
lending channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
C.6. Data selection and other information on data construction . . . . . . . . . . 204
C.7. Variables description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
C.8. Additional Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
C.9. Additional Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
vii
List of Tables
1.1. Summary Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.2. Effect of the policy change on patenting: main results . . . . . . . . . . . . . 32
1.3. Timing of the effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
1.4. Evidence on patent quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
1.5. Effect of the decision on public firms . . . . . . . . . . . . . . . . . . . . . . 46
1.6. Evidence on Patent Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1.7. Effect of the decision across firm size . . . . . . . . . . . . . . . . . . . . . . 54
1.8. Effect of the decision across measures of financial constraint . . . . . . . . . 56
1.9. Stock Market returns and Litigation Exposure . . . . . . . . . . . . . . . . . 59
2.1. Summary Statistics: Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
2.2. Summary Statistics: Changes . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2.3. Investment and funding policies . . . . . . . . . . . . . . . . . . . . . . . . . 80
2.4. Investment heterogeneity and financial constraints . . . . . . . . . . . . . . . 87
2.5. Investment heterogeneity across fund age measures . . . . . . . . . . . . . . 90
2.6. Accounting Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
2.7. Exit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3.1. Summary Statistics - Loan-level and Firm-level variables . . . . . . . . . . . 112
3.2. The Bank Lending Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
viii
3.3. Bank Lending Channel: Total Credit and Credit Lines . . . . . . . . . . . . 122
3.4. The Bank Lending Channel: alternative measures . . . . . . . . . . . . . . . 126
3.5. The Bank Lending Channel w/ relationship controls . . . . . . . . . . . . . . 128
3.6. The Bank Lending Channel: Lender-Borrower Sorting and Single Lender
Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
3.7. TransmissionMechanismofTheBankLendingChannel: CapitalandFunding
Channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
3.8. The Firm Borrowing Channel . . . . . . . . . . . . . . . . . . . . . . . . . . 141
3.9. Real Effects: Sovereign Exposure on Investments and Employment . . . . . . 145
3.10.Real Effects: Size and Dependence on External Finance . . . . . . . . . . . . 148
A.1. Distribution of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
A.2. Effect of the policy change on patenting: Poisson model . . . . . . . . . . . 173
A.3. Stock Market returns and Litigation Exposure . . . . . . . . . . . . . . . . . 174
A.4. Robustness: Leave-out-Industry . . . . . . . . . . . . . . . . . . . . . . . . . 175
A.5. Effect of the policy change on patenting: alternative Exposure measure . . 176
A.6. Robustness: differential linear effect before and after the shock . . . . . . . . 177
A.7. Timing of the effects across technologies . . . . . . . . . . . . . . . . . . . . 178
A.8. Robustness: differential linear effect before and after the shock . . . . . . . . 179
A.9. Evidence on Patent Mix: pre-trend analysis . . . . . . . . . . . . . . . . . . 180
A.10.Heterogeneity of the effects: robustness . . . . . . . . . . . . . . . . . . . . 181
B.1. Summary Statistics alternative matching: Level . . . . . . . . . . . . . . . . 185
B.2. Summary Statistics alternative matching: Changes . . . . . . . . . . . . . . 186
B.3. Robustness: alternative matching model . . . . . . . . . . . . . . . . . . . . 187
B.4. Robustness: no MBO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
B.5. Robustness: only 2007-2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
ix