1 Innovation-Related Diversification and Firm Value

We examine how corporate innovations influence firms ’ industrial diversification decisions and how innovation-related diversification affects firm value. Our fixed effect, 2SLS and GMM models consistently show that corporate innovations lead to greater extent of diversification. The 2SLS model uses the staggered implementation of U.S. state-level R&D tax credits as an instrumental variable for corporate innovations. We also find a firm is more likely to diversify into an industry where it has more applicable innovations. Most importantly, we find that innovation-related diversification leads to significantly higher firm value. Our results are robust to different corporate innovation measures and sample periods. Key words: innovation; diversification; firm value EFM Classification: 21