Corporate highs — how marijuana legalization impacts firm innovation

If you would have told Shagun Pant she’d be researching the corporate impact of marijuana legalization back when she was in college, she would have assumed you had eaten one too many edibles. That’s because corporate studies of any kind were well outside her wheelhouse. Pant wasn’t a finance major or an econ student. She had enrolled at the University of Mumbai with one goal in mind – to become an electrical engineer.

“I chose engineering because I really like quantitative and analytical thinking,” said Pant. Eventually, however, she realized her computational skills could also be very useful in business. That led to a master’s degree in information systems at the University of Iowa, a PhD in finance at the University of Utah, and research covering a wide range of topics, from agency costs and banking regulation to gender diversity and firm innovation. But of all her research, one project stands out for its title alone.

“Do Firms Get High? The Impact of Marijuana Legalization on Firm Performance, Corporate Innovation, and Entrepreneurial Activity” offers a take that’s well outside the normal legalization narrative. While social scientists and engineers have long debated legalization’s impact on everything from crime rates to tax revenue, Pant wanted to know how it affected corporate innovation. So, she crunched the numbers, analyzing years of firm-level data.

“What we were doing was looking at states that legalized marijuana and the firms that are headquartered in those particular states to see if there is a before or after effect on the innovation that comes out of them,” said Pant. Like most national trends, medical marijuana legalization started in California, so that’s where her work began. And what she discovered could be useful for states looking to follow the Golden State’s lead.

“What we find is that we do see an increase in both the patents coming out of those firms as well as the quality of those patents,” said Pant, who used citation counts to derive the latter. Furthermore, Pant’s research revealed that firms headquartered in marijuana-legalizing states receive higher market valuations, earn higher abnormal stock returns, and enjoy higher employee productivity.

So, what accounts for the difference? It’s not necessarily that employees at those firms are using marijuana. Data for that would be very difficult to obtain. Rather, says Pant, it could be that marijuana legalization sends a message to potential employees that a state is more progressive, which could impact corporate efforts to recruit and retain human capital.

Business analytics provides the tools to make those types of correlations. That’s why the new Gies associate professor is excited to be teaching BADM 210, which offers students an introduction to the subject.

“I really love teaching,” says Pant, who joins Gies from the Tippie College of Business at the University of Iowa, where she taught finance and wealth management for more than a decade. “I like the idea of taking complicated concepts and then breaking them down, abstracting away all of the details and explaining the basics.” And that’s not the only thing she hopes to break down.

“A lot of times I feel like people work in silos and we don’t have much cross-sectional mingling.” With her interdisciplinary background, Pant hopes to change that, reaching across departments to explore exciting research collaborations at the intersection of finance, labor markets, and corporate innovation.