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Corporate Governance and Innovation: Theory and Evidence

56 Pages Posted: 26 Mar 2008 Last revised: 12 Jun 2014

Haresh Sapra

University of Chicago - Booth School of Business

Ajay Subramanian

Georgia State University

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

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Date Written: July 7, 2012

Abstract

We develop a theory to show how external corporate governance mechanisms, such as the market for corporate control, and internal governance mechanisms interact to affect innovation by …firms. Our model generates the novel testable implication that there is a non-monotonic U-shaped relation between the degree of innovation undertaken by …firms and the external takeover pressure they face. The U-shaped relation arises from the incentive effects of the interaction between expected takeover premia and private bene…fits of control both of which vary with the takeover pressure that the …firm faces. In particular, the key characteristics of innovation that distinguish it from mere risk-taking play a central role in generating the U-shaped relation.

We show strong empirical support for the predicted non-monotonic relation using both ex ante and ex post measures of innovation. Our empirical analysis exploits the cross-sectional as well as time-series variation in takeover pressure created by the sequential passage of anti-takeover laws across different states. Our results suggest that innovation is fostered either by an unhindered market for corporate control, or by anti-takeover laws that are severe enough to effectively deter takeovers.

Keywords: Anti-takeover laws, Blockholders, Corporate Governance, Innovation, External Governance, Internal Governance, Monitoring, Takeovers

JEL Classification: G31, G34, K22

Suggested Citation

Sapra, Haresh and Subramanian, Ajay and Subramanian, Krishnamurthy, Corporate Governance and Innovation: Theory and Evidence (July 7, 2012). 3rd Annual Conference on Empirical Legal Studies Papers; Chicago Booth Research Paper No. 08-05. Available at SSRN: https://ssrn.com/abstract=1103676 or http://dx.doi.org/10.2139/ssrn.1103676

Haresh Sapra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Ajay Subramanian

Georgia State University ( email )

Depts. of Finance & Risk Management and Insurance
P.O. Box 4050
Atlanta, GA 30303
United States
404-413-7483 (Phone)

HOME PAGE: http://robinson.gsu.edu/profile/ajay-subramanian/

Krishnamurthy Subramanian (Contact Author)

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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