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Do Informal Contracts Matter for Corporate Innovation? Evidence from Social Capital

Published online by Cambridge University Press:  06 August 2019

Atul Gupta ,
Kartik Raman Open the ORCID record for Kartik Raman [Opens in a new window]  and
Chenguang Shang
Atul Gupta
Affiliation:
Gupta, [email protected], Bentley University
Kartik Raman*
Affiliation:
Raman, [email protected], Bentley University
Chenguang Shang
Affiliation:
Shang, [email protected], Texas State University McCoy College of Business
*
Raman (corresponding author), [email protected]
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Abstract

We examine the relevance of informal contracting mechanisms for corporate innovation. Using social capital to capture the social costs imposed on opportunistic behavior by management, we report evidence that firms headquartered in states with higher levels of social capital are associated with more innovation. This result is more pronounced when employees are more susceptible to holdup (e.g., firms with low labor union coverage, firms located in states with weak legal protections for employees, and firms surrounded by few external employment opportunities) and when employees face higher levels of information asymmetry. Our study highlights the importance of informal contracts for innovation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 5 , August 2020 , pp. 1657 - 1684
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We are grateful to an anonymous referee, Bill Johnson, Paul Malatesta (the editor), Matt Ross, Ioannis Spyridopoulos, seminar participants at Bentley University, and conference participants at the 2015 Boston Area Finance Symposium and the 2016 Financial Management Association Annual Meeting for helpful comments and suggestions.

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