Internal capital allocation in IPOs and corporate innovation: The moderating role of political connections

We explore the effect of initial public offering (IPO) capital allocation on corporate innovation. We document that IPOs enhance corporate innovation through allocation of internal capital to innovative projects. While political connections moderate the IPO-innovation relation in that connected firms allocate less IPO capital to innovative projects and are more likely to reallocate their resource from innovative to non-innovative projects. Resource allocation to innovative projects results in better post-IPO performance, especially in non-connected firms. Overall, this study identifies intra-firm capital allocation as an important factor that contribute to firm innovation and the distortion of resource allocation linked to political ties.