Financial Innovation and Fragility

In this paper, I evaluate the impact of innovative activity of
financial agents on their fragility in a competitive framework.
There exist a vast array of concerns about the interconnection of
financial innovations, financial distress of firms and financial
crises provided by theoretical arguments. I build on these and
assess 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 show that a larger
degree of innovation negatively (positively) affects firm stability
(fragility) after controlling 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.