Essays in empirical finance in high-technology industries

Through three closely related essays, this dissertation explores the financial aspects of high-tech firms. Specifically, it studies how firm-specific knowledge capital affects high-tech firm's market value, capital structure, and investors' stock market behavior.; The first essay studies the effect of firm-specific knowledge capital on high-tech firm's market value. We develop and implement a real option-pricing model for valuing knowledge assets such as patents, ties to star scientists. Given the fact that the firms with more knowledge capital are likely to have a greater probability per unit time of making a valuable R&D breakthrough, we argue and confirm empirically that both the values of the firm and the likelihood of jumps in the value are increasing in knowledge assets. For example, the tied articles add {dollar}630,000 each to average biotech firm values. The option pricing approach proves useful as a means of valuing intangible assets.; The second essay examines the stock market's short-run and long-run reactions to high-tech firms' innovation news announcements. Besides positive announcement period abnormal returns and abnormal trading volumes, I also find a long-run negative drift in the stock prices several months subsequent to the firms' innovation news announcements. Cross-sectional analysis shows that the long-run negatives returns are negatively related to the size, positively related to book-to-market ratio, and positively related to R&D intensity. The evidence strongly favors investor expectation error hypothesis: given high degree of technical uncertainty concerning the firm's innovative events, investors easily develop erroneous expectation about the innovations. As event time passes, more information is revealed and investors start to correct the mistakes they made in their initial responses. The firms that were badly priced before will have large negative abnormal returns.; The third essay explores how knowledge capital affects the firm's financing choice. In this essay, I propose a model in which the manager minimizes the firm-specific tax liability that can be viewed as an option portfolio. The intellectual capital affects the dynamics of the firm's earning process, which further affects the values of the tax options. Numerical results from the model show that there is a positive relationship between the firm's leverage level and its knowledge capital. Evidence from the US biotech firms confirms this result. Furthermore, by employing an event study approach, I find that a firm tends to increase its leverage level right after the enhancement of its knowledge assets.