The Diffusion of Deal Innovations in Complex Contractual Networks

We introduce a new method for studying contractual evolution in complex markets. We situate the diffusion of a deal innovation within an advisory network and then provide methods for inferring a law firm's preference for adopting the innovation and for calculating each firm's proximity to prior adopters. This allows for granular analysis of firm-to-firm interactions as a diffusion mechanism. To demonstrate, we study the top-up option's diffusion in two-step tender offers from 1999 to 2013. Diffusion occurs in 40% of observations in which a non-adopting firm is directly connected to a prior adopter of the option. By contrast, diffusion occurs in only 4% of observations without a direct connection to a prior adopter. We find this relationship persists in even the most comprehensive regression analysis, finding that directly connected firms have a hazard of adoption that is 4.01 times that of firms with no direct connection, even after controlling for deal, firm, and industry characteristics. These results demonstrate the importance of firm-to-firm information transfers to contractual evolution and underscore their study as a research priority.