Subsidiary Legal Entities and Innovation

Kenneth Ayotte

The Review of Corporate Finance Studies, 2017, vol. 6, issue 1, 39-67

Abstract: Placing innovative assets in a separate subsidiary creates more autonomy for the unit manager of the innovation than a division, even when the subsidiary is wholly owned and controlled by the parent. The key driver is limited liability: unlike a division, the parent has the option to walk away from the subsidiary’s debt obligations. As a result, the parent invests less in developing internal uses for the innovation. This causes the unit manager to invest more in developing independent uses for the innovation: he must ”sink or swim” on his own effort, and his desired actions are less subject to overrule.

JEL-codes: G31 G32 G33 K10 K11 K12 K22 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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