We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.

This paper establishes a strong relation between technology competition and corporate bankruptcy. Using detailed firm-level patent data we show that: 1) the capability of firms to innovate predicts future bankruptcies better than the typical measures such as Z-score and credit rating, 2) technology-related bankruptcies are less sensitive to the business cycle and industry success, and 3) firms that go bankrupt as a result of technology competition experience larger declines in earnings and stock prices.

intensiveness at the country level), alternative proxies for financial market development, alternative proxies for high-tech intensiveness, and alternative innovation proxies defined at the technology class level.Collectively, these tests help us understand where the variation that drives our main results originates.Our paper offers new insights into the real effects of financial development and is related to two streams of literature. First, it contributes to the literature on finance and growth. Starting with Schumpeter (1911) and Robinson (1952), there has been a large literature trying to understand the relation between financial systems and economic growth. Recent theoretical work indicates two likely links between finance and growth: Bencivenga and Smith (1991) and Jappelli and Pagano (1993) argue that financial markets matter by affecting the volume of savings available to financial investments, while Greenwood and Jovanovic (1990) suggest that financial markets matter by increasing investment productivity. 1 Second, our paper contributes to the emerging literature on finance and innovation that examines various strategies for promoting innovation. Manso (2011) argues that managerial contracts that tolerate failure in the short run and reward success in the long run are best suited for motivating innovation. Also, Ferreira, Manso, and Silva (2012) show that private rather than public ownership spurs innovation. Nanda and Rhodes-Kropf (2011) suggest that "hot" rather than "cold" financial markets help promote innovation. 2 Unlike earlier studies, we use a rich cross-country data set to examine specific economic mechanisms through which finance affects innovation and document the contrasting impacts of equity market and credit market development.Our paper is distinct from, but also complementary to, a few recent studies. Using a sample of U.S. IPO firms, Bernstein (2012) finds that going public significantly reduces firms' innovation quality. While this result is important, we believe this finding depends on the existence of a well-developed equity market in the U.S.; in other words, the negative effects of public equity markets on innovation along the intensive margin (i.e., U.S. firms only in his 1 Empirical evidence linking finance and growth has shown that the size, depth, and liberalization of an economy's financial system positively affect its future growth in per capita, real income, entrepreneurship, employment, and output (e.

This paper establishes a strong relation between technology competition and corporate bankruptcy. Using detailed firm-level patent data we show that: 1) the capability of firms to innovate predicts future bankruptcies better than the typical measures such as Z-score and credit rating, 2) technology-related bankruptcies are less sensitive to the business cycle and industry success, and 3) firms that go bankrupt as a result of technology competition experience larger declines in earnings and stock prices.

for their guidance during his doctoral study at the Graduate School of Business of Columbia University. C.-M. Kuan thanks the NSC of Taiwan for research support (97-2410-H-002-217-MY3). All errors remain ours.

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

† We are grateful to C. Jones, B. Lehmann, C. J. Neely, M. J. Ready, P. Saffi, A. Timmermann and the participants of the Taipei conference on "Analysis of High-Frequency Financial Data and MarketMicrostructure" for their valuable comments and suggestions. We also thank P. R. Hansen for sharing his recent research with us. AbstractIn this paper, we re-examine the profitability of technical analysis using the Reality Check of White (2000, Econometrica) that corrects the data snooping bias. Comparing to previous studies, we study a more complete "universe" of trading techniques, including not only simple trading rules but also investor's strategies, and we test the profitability of these rules and strategies with four main indices from both relatively mature and young markets. It is found that profitable simple rules and investor's strategies do exist with statistical significance for NASDAQ Composite and Russell 2000 but not for DJIA and S&P 500. Moreover, the best rules for NASDAQ Composite and Russell 2000 outperform the buy-and-hold strategy in most in-and out-of-sample periods, even when transaction costs are taken into account. We also find that investor's strategies are able to improve on the profits of simple rules and may even generate significant profits from unprofitable simple rules.

Motivated by a theoretical model, we examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more. Innovation activities, measured by patent-based proxies, are not, on average, affected by which policy is in place. Innovation activities, however, drop significantly during times of policy uncertainty measured by national elections. The drop is greater for more influential innovations (citations in the right tail, exploratory rather than exploitative innovations) and for innovation-intensive industries. We use close presidential elections and ethnic fractionalization to address endogeneity concerns. We uncover the mechanism underlying the main result by showing that the number of patenting inventors decreases with policy uncertainty. Political compromise, we conclude, encourages innovation.