Olga Itenberg
Interests: Macroeconomics, Innovation, Corporate Finance

Citizenship: USA and Russian Federation
Fluent in: English, Russian

Job Market Paper

Firm Size, Equity Financing and Innovation Activity

I document a stark reallocation of innovation activity, measured by both R&D expenditures and patenting, from large to small public manufacturing firms in the U.S. over the period 1976 to 2005. Whereas in the past, different sized firms seemed to appropriate close to a constant proportion of their revenues to R&D, nowadays, small firms contribute orders of magnitude more to these efforts as compared to their larger counterparts. In this paper, I relate the rise in innovation intensity of small firms to their increased use of external equity financing. Next, I establish that two financial changes, decreased costs of issuing equity and tax rates on corporate distributions, are quantitatively important drivers of the innovation and equity trends. To do so, I build a theoretical model with firm dynamics, in which heterogeneous firms choose innovation efforts and finance their R&D via internal and costly external funds. In the absence of taxes and external financing costs, the model generates a negative relationship between innovation incentives and firm size, inducing a disproportionate investment in R&D by small firms. Introducing these frictions into the model disrupts the monotonic relationship between R&D intensity and firm size. The model, estimated using U.S. public firm-level data, is able generate a sizable rise in innovation intensity and equity financing use among small firms as a result of changes in dividend tax rates and equity issuance costs.

Research

Capital Structure and Innovation Riskiness (joint with Zach Stangebye)

Since the 1970s, the leverage of innovative firms in the United States fell from 21.1 percent to 12.2 percent, but there was no significant leverage trend for non-innovative firms. Using patent statistics, we document new empirical facts that relate firm leverage and risk associated with innovation projects. Next, we build a theoretical model of equilibrium capital structure based on the risk of the project to explain this phenomenon. We demonstrate that equilibrium debt payoff functions are concave since debt-holders absorb the impact of bad income realizations through default and that equilibrium equity payoff functions are convex since shareholders exclusively receive high income realizations. We use the model to parse apart the specific contributions of two possible explanations of this leverage phenomenon: Tax changes/financial deregulation in equity markets and increased project risk. Our calibrated model suggests that both forces are at work, but that effective costs associated with issuing equity must have fallen by 31.2 percent while project risk only increased by 4.7 percent.

Teaching Experience

Fall 2012, Introduction to Economics and Its Applications, Head TA for Prof. Gizem Saka
Spring 2010, 2011, Numerical Methods in Macroeconomics, TA for Prof. Jeremy Greenwood
Summer 2010, 2011, Introductory Microeconomics, Instructor
Fall 2011, Introduction to Economics and Its Applications, Head TA for Prof. Uriel Spiegel
Fall 2009, 2010, Introduction to Economics and Its Applications, Recitation Instructor for Prof. Rebecca Stein
Spring 2009, Introduction to Macroeconomics, Recitation Instructor for Prof. Andrea Jao

References

Ufuk Akcigit
(215) 898-7711
uakcigit@econ.upenn.edu

Joao Gomes
(215) 898-3666
gomesj@wharton.upenn.edu

Jeremy Greenwood
(215) 898-1505
recommendations@jeremygreenwood.net

Status

I am on the job market and will be available for interviews during the AEA/AFA meetings in Philadelphia from 1/3 to 1/5.