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Corporate Governance and Innovation: Theory and Evidence

Published online by Cambridge University Press:  23 January 2015

Haresh Sapra ,
Ajay Subramanian  and
Krishnamurthy V. Subramanian
Haresh Sapra
Affiliation:
[email protected], Booth School of Business, University of Chicago, 5807 S Woodlawn Ave, Chicago, IL 60637
Ajay Subramanian
Affiliation:
[email protected], Robinson College of Business, Georgia State University, 35 Broad Street, Atlanta, GA 30303
Krishnamurthy V. Subramanian
Affiliation:
[email protected], Indian School of Business, Gachibowli, Hyderabad, Telangana 500032, India.
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Abstract

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

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 4 , August 2014 , pp. 957 - 1003
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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