The Welfare Gains and Diffusion of Corporate Finance Innovations

This paper measures the gains accrued to financing firms as new corporate products are created. Innovations in corporate products increase the choice set and make the underwriting market more competitive. The resulting gains are measured using estimates of a structural model of the choice between different varieties of innovative and standard securities across time. The estimation method handles two major challenges: that underwriting fees of non chosen varieties are unobservable, and that the observed ones are endogenous. I address these problems with a price-setting equation derived from the underwriter's profit maximization problem. The estimates show that innovation introduces large average gains of up to $4.66 million per financing firm. Underwriting markups fall as the choice set grows, from about 50% on average to 10%.