INNOVATION IN DECLINING AND DISTRESSED FIRMS

Firms often face performance shortfalls, either relative to their past performance or relative to their competitors\u27 performance. Sometimes, performance shortfalls are so severe that firms are forced into bankruptcy. This dissertation investigates how organizations respond to such performance shortfalls, and how those responses affect their subsequent performance. It focuses on three specific aspects of these responses---the intensity of organizational search, and the roles of intangible asset divestitures and human capital. The dissertation consists of three essays. The first essay proposes a persistence-based framework of organizational search. This framework connects the relative persistence of social and historical relative performance with the relative persistence of the carryover effects of two types of organizational search, innovative and market search. This essay posits that social relative performance is more persistent than historical relative performance; as a result, social relative performance has a stronger effect on innovative search, which has a more persistent carryover effect than market search. Consistent with the proposed framework, I find that, while a positive social relative performance is associated with a reduction in a firm’s search intensity, a negative social relative performance increases firm search intensity. On the contrary, historical relative performance does not exhibit this differential pattern. Finally, using an industry-level measure of profit persistence, I find that social relative performance has a stronger effect on innovative search in high-persistence industries, compared to its effect in low-persistence industries. Together, these findings highlight persistence as an important mechanism that links historical and social relative performance to innovative and market search. The second essay investigates the effect of the divestiture of technological assets on large bankrupt firms to see whether the divestiture strategy will help them to overcome competitive disadvantages, or if the firm will sink into the mud of competitive disadvantages. I construct a sample containing large patenting public firms that file for bankruptcy in the United States. I build a two-phase framework to examine the antecedents and consequences of divesting technological assets. The first phase focuses on the bankruptcy period and analyzes which kinds of technological assets are more likely to be divested. The second phase relates to the post-bankruptcy period and explores the performance changes and knowledge utilization associated with divestiture. I analyze two attributes of the technological assets: whether the assets are of high value, and whether the assets are in a firm’s core technological areas. As the two attributes contain information about the price of assets when they get liquidated, and the embeddedness of knowledge in the correspondent technological areas respectively, they are naturally connected with a firm’s post-bankruptcy profitability, technological function, and knowledge utilization. Specifically, I find that high-value or non-core technological assets are more likely to be divested than their counterparties are. I also find that, while divesting high-value technological assets can improve profitability, divesting noncore ones is associated with worsen technological function and less knowledge utilization in existing and new technological areas. By examining how the attributes of the assets affect the gains and losses in profitability, technological performance, and knowledge utilization associated with the divestiture, I extend the current understanding of resource reconfiguration among bankrupt firms. The last essay investigates the effect of bankruptcy on the mobility of a firm’s skilled human capital. Using a novel data set, I compare the skilled human capital turnover patterns within the bankrupt and non-bankrupt firms over a prolonged period. Adopting propensity score matching and difference-in-difference approach, I find that bankrupt firms have fewer patent inventors enter during the post-bankruptcy period than that of the pre-bankruptcy period, compared to the inventors’ entry of non-bankrupt firms during the same timespans. Additionally, I find that bankrupt firms have fewer inventors retained after bankruptcy, compared to that of non-bankrupt firms. I argue that this turnover pattern in bankrupt firms could be driven by lack of ability to attract new inventors and to retain the existing inventors. Furthermore, I find that bankrupt firms have fewer star inventors and more novice inventors remained in the firm after bankruptcy, which implies that the bankrupt firms may suffer from a reduction in innovation capabilities. The findings suggest that the bankrupt firms face unique human capital management problems, compared to non-bankrupt firms. In sum, this dissertation investigates how an organization copes with different performance shortfalls and how these strategies have an effect on an organization’s subsequent economic and innovative performance. The findings shed light on the strategies of distressed or bankrupt firms and their unique challenges in technological assets management and human capital management