Corporate Governance and Innovation: Theory and Evidence

We develop a theory to show how external and internal corporate governance mechanisms a¤ect 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 bene…ts 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 di¤erent states. Innovation is fostered either by an unhindered market for corporate control, or by anti-takeover laws that are severe enough to e¤ectively deter takeovers. We thank Viral Acharya, Phil Berger, Riccardo Calcagno, Enrico Perotti, Josh Rauh, Sriram Venkataraman, and conference and seminar participants at the 2009 NBER Law and Economics Spring meetings, 2008 NBER Summer Institute on Corporate Finance, the 2008 RICAFE2 Conference on Entrepreneurship and Innovation, the 2008 Conference on Empirical Legal Studies, the 2008 Symposium on Financial Intermediation Markets, the 2008 Conference on National Institute of Security Markets, the All-Georgia Finance Conference, the Carnegie Mellon University Theory Conference, the Emory University Finance seminar, the Emory-Georgia Tech joint seminar series on Entrepreneurship, Innovation and Public Policy, Georgia State University, Temple University, the University of Chicago, the University of Colorado, the University of Minnesota, the University of Maryland, and the University of Texas at Austin Accounting and Corporate Governance conference for valuable comments. We thank Ningzhong Li for excellent research assistance. Haresh Sapra, Ajay Subramanian, and Krishnamurthy Subramanian respectively thank the University of Chicago Booth School of Business, the J. Mack Robinson College of Business, the Emory University Goizueta Business School, Indian School of Business and the Kau¤man Foundation for …nancial support. The usual disclaimers apply.