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Corporate Governance and Innovation: Theory and Evidence

80 Pages Posted: 3 Feb 2013 Last revised: 8 May 2013

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: February 1, 2013

Abstract

We develop a theory to show how external and internal corporate governance mechanisms affect innovation. We show that there is a U-shaped relation between innovation and external takeover pressure, which arises from the interaction between expected takeover premia and private benefits of control. We show strong empirical support for the predicted relation using ex ante and ex post innovation measures. We exploit the variation in takeover pressure created by the passage of anti-takeover laws across different states. Innovation is fostered either by an unhindered market for corporate control, or by anti-takeover laws that are severe enough to effectively deter takeovers.

Suggested Citation

Sapra, Haresh and Subramanian, Ajay and Subramanian, Krishnamurthy, Corporate Governance and Innovation: Theory and Evidence (February 1, 2013). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2210609

Haresh Sapra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Ajay Subramanian (Contact Author)

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

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

Hyderabad, Gachibowli 500 019
India

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