The Impact of Financial Innovation on Firm Stability

In this paper, I evaluate the impact of competition on firm stability between financial agents who are able to invest in innovations to reap profits. Given a vast array of concerns and interconnections between financial innovations, financial distress of firms and financial crises provided by theoretical assessments, I analyze empirically the causal link between a financial agents' innovativeness and stability. Using a unique data set on financial innovations in the USA between 1990 and 2002, I can show that a larger degree of innovation negatively affects firm stability safe for the underlying firm characteristics. The results are robust against different modifications of innovation measures and against different fragility parameters indicating profitability, activity risk and risk of insolvency.