Krishnamurthy Subramanian - Profile on Academia.edu (original) (raw)

Papers by Krishnamurthy Subramanian

thank Hanh Le and Chandrasekhar Mangipudi for excellent research assistance. Labor Laws and Innov... more thank Hanh Le and Chandrasekhar Mangipudi for excellent research assistance. Labor Laws and Innovation Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.

5-2018 Dismissal Laws , Innovation and Economic Growth

I theoretically and empirically show that dismissal laws laws that impose hurdles on firing of em... more I theoretically and empirically show that dismissal laws laws that impose hurdles on firing of employees spur innovation and thereby economic growth. Theoretically, dismissal laws make it costly for firms to arbitrarily discharge employees. This enables firms to commit to not punish short-run failures of employees. Because innovation is inherently risky and employment contracts are incomplete, dismissal laws enable such commitment. Specifically, absent such laws, firms cannot contractually commit so ex-ante. The commitment provided by dismissal laws encourages employees to exert greater effort in risky, but path-breaking, projects thereby fostering firm-level innovation. I provide empirical evidence supporting this thesis using the discontinuity provided by the passage of the federal Worker Adjustment and Retraining Notification Act. Using the fact that this Act only applied to firms with 100 or more employees, I undertake difference-indifference and regression discontinuity tests t...

The Journal of Law and Economics, 2018

Using unique borrower-level data, we study the causal effect of debt relief on the loan performan... more Using unique borrower-level data, we study the causal effect of debt relief on the loan performance of distressed and nondistressed borrowers. We employ a regression discontinuity design that exploits exogenous cutoff dates underlying the 2008 Indian debt waiver program to separate defaulters on loans into beneficiaries and nonbeneficiaries of waivers. By identifying distress before the waiver program using exogenous borrower-level shocks, we examine performance on loans originated after the waiver program. Loan performance of nondistressed beneficiaries worsens, while that of distressed borrowers improves. While existing studies aggregate the effects of debt relief across distressed and non distressed borrowers, we highlight crucial differences between them. We would like to thank Dhammika Dharmapala and two anonymous referees for their thoughtful feedback.

Agency Costs of CEO Turnover in Banks: Evidence Using Exogenous Turnovers

SSRN Electronic Journal, 2015

We examine the effects of chief executive officer (CEO) turnover in banks. Incoming bank CEOs fac... more We examine the effects of chief executive officer (CEO) turnover in banks. Incoming bank CEOs face problems of information asymmetry because banks’ operations are opaque and bank risk can change dramatically in a short time. These CEOs may therefore change bank policies to manage their personal risks. Since CEO turnover is usually endogenous, we utilize a setting in which CEO turnover is based solely on retirement age and is thus exogenous to bank performance. Consistent with our thesis, incoming CEOs increase provisioning for future delinquencies and shrink lending. Bank stock prices decline following these changes. Politically motivated lending or ever-greening cannot explain our results.

The Color of Money: A Startup's Choice Among Venture Capitalists

SSRN Electronic Journal, 2012

Abstract: Venture Capitalists (VCs) differ significantly from one another with respect to the non... more Abstract: Venture Capitalists (VCs) differ significantly from one another with respect to the non-financial resources--from business expertise to the network of contacts with potential suppliers, customers, employees and IPO underwriters--they offer their portfolio firms. In ...

How Do Firm Capabilities Affect Their Boundary Decisions?: Theory and Evidence

SSRN Electronic Journal, 2004

I would like to thank my advisors – Marianne Bertrand, Wouter Dessein, Milton Harris, Raghuram Ra... more I would like to thank my advisors – Marianne Bertrand, Wouter Dessein, Milton Harris, Raghuram Rajan and especially Luigi Zingales for their encouragement, support and guidance and participants at the University of Chicago workshop on Theory of Organizations and the Corporate ...

SSRN Electronic Journal, 2011

Is privatization in a country related to the stringency of its employment protection laws (EPLs)-... more Is privatization in a country related to the stringency of its employment protection laws (EPLs)-and, if so, how? We address these questions using privatization deals in 14 European countries over 3 decades and the changes in EPLs in a country. Using traditional difference-indifferences tests exploiting major changes and generalized difference-indifferences tests for the full sample, we find that stringent EPLs discourage privatization. For identification, we use two sets of triple-difference tests that control for country-level omitted variables using fixed effects for each country-year pair. First, using cross-sectional differences across industries in a country, we find that the effect of EPLs on privatization is disproportionately greater in industries in which separation rates and relocation rates are higher. Second, using productivity measures for US industries as an instrument, we find that the effect of EPLs on privatization is disproportionately greater in less productive industries.

SSRN Electronic Journal, 2012

We investigate Project Finance as a private response to ine¢ ciencies created by weak legal prote... more We investigate Project Finance as a private response to ine¢ ciencies created by weak legal protection of outside investors. We o¤er a new illustration that law matters by demonstrating that for large investment projects, Project Finance provides a contractual and organizational substitute for investor protection laws. Project Finance accomplishes this by making cash ‡ows veri…able, thereby enhancing debt capacity. Two features of Project Finance make cash ‡ows veri…able: (i) contractual arrangements made possible by structuring the Project Company as a single, discrete project legally separate from the sponsor; and (ii) private enforcement of these contracts through a network of project accounts that ensures lender control of project cash ‡ows. Comparing the incidence of bank loans for Project Finance with regular corporate loans for large investments ("Corporate Debt Finance"), we show that Project Finance is more likely in countries with weaker laws against insider stealing and weaker creditor rights in bankruptcy. Our identi…cation relies on di¤erence-in-di¤erence tests that exploit exogenous country-level changes in legal rules.

SSRN Electronic Journal, 2014

We investigate the effect of education on voting preferences using actual voting records from the... more We investigate the effect of education on voting preferences using actual voting records from the Indian elections. We proxy differences in the educational levels of voters using minimum educational qualifications required for a particular category of voters. Using panel regressions that provide explanatory power of almost 100%, we find that educated voters exhibit progressive preferences. Compared to general voters, educated voters' support is 20% lower for heinous criminals, 20% lower for the corrupt, and 13% more for females. Surprisingly, while general voters differ from educated voters in supporting dubious candidates, both general and educated voters prefer women candidates.

SSRN Electronic Journal, 2013

We examine the effect of CEO turnover on earnings management in banks using exogenous variation g... more We examine the effect of CEO turnover on earnings management in banks using exogenous variation generated by age-based retirement policies in Indian public sector banks. Banks experiencing CEO turnover report 23% lower profit-to-sales and 22% lower return-on-assets in the transition quarter. Increased provisions lead to these decreases though they do not associate with subsequent increases in non-performing assets. Shorter CEO tenure exacerbates earnings management by the incoming CEO. The real effects of earnings management are highlighted by a 1.7% decrease in lending and a 1.5% decrease in the stock price. None of these effects manifest for other public sector firms. Personal risk management accounts for earnings management by incoming bank CEOs.

SSRN Electronic Journal, 2012

Does deregulation of bank entry enhance bank stability or exacerbate bank fragility? Theoreticall... more Does deregulation of bank entry enhance bank stability or exacerbate bank fragility? Theoretically, the effect of deregulation of bank entry on bank failures is ambiguous. Using the deregulation of entry restrictions in the U.S. states, we show that deregulation enhances bank stability by lowering instances of bank failures. Placebo effects do not account for our results: the deregulation had no effect on thrift failures. Preexisting bank failures in a state did not determine its timing of deregulation, which assures against reverse causal effects. The benefits of deregulation are strongest in environments where market structure changed the most and stem from geographical diversification, operating efficiencies and reduced loan losses.

SSRN Electronic Journal, 2012

We estimate the value of innovative assets of private, innovative firms. Since young, private fir... more We estimate the value of innovative assets of private, innovative firms. Since young, private firms are the primary drivers of mold-breaking innovation, we focus on such firms. We adopt a novel approach that uses the price paid in the market for acquisitions of young, private targets and combine it with unique data hand-collected from Google Patents. We minimize systematic biases by comparing across deals undertaken within the same year by the serial acquirer Cisco Systems, whose processes for acquisitions are quite fine-tuned. To alleviate concerns about external validity, we cross-check the estimates obtained using Cisco's acquisitions with those undertaken by Yahoo and Google. We find order-ofmagnitude higher estimates for the value of patents when compared to existing studies. Apart from the intellectual property rights provided by patents, the value of a portfolio of innovative assets increases with the expertise underlying the assets as measured using citations to patents. Finally, consistent with intangible assets having a value that is contextspecific, we find that the value of the target's innovative assets increases when these assets overlap more with the acquirer's assets and with the assets of the acquirer's competitors. Apart from contributing to the literature on valuing innovative assets, ours is the first study to value innovative assets in mergers and acquisitions.

SSRN Electronic Journal, 2011

Though public infrastructure-physical and financial-is widely believed to play a critical role in... more Though public infrastructure-physical and financial-is widely believed to play a critical role in attracting Foreign Direct Investment (FDI), identifying this effect remains a challenge. In this paper, we use unique data to identify this effect by exploiting purely cross-sectional variation among approximately 600 districts in India. We examine the effect of infrastructure in 2001 on cumulative FDI flows into the district during 2002-07. Using panel regressions that include state fixed effects, we employ a two-pronged identification strategy. First, we test by netting out average (and maximum) FDI inflows into surrounding districts. Second, we exploit variation among different sectors within a district depending upon the sector's propensity to attract FDI. Since our variables vary primarily at the district level, these tests together control for all omitted variables at the district level. Surprisingly, we find that FDI inflows remain insensitive to changes in infrastructure till a threshold is reached; thereafter, FDI inflows increase steeply with an increase in infrastructure.

SSRN Electronic Journal, 2011

We develop a theory to show how external and internal corporate governance mechanisms affect inno... more 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.

SSRN Electronic Journal, 2013

We highlight the costs from a principal rotating agents among tasks when decisionmaking inside a ... more We highlight the costs from a principal rotating agents among tasks when decisionmaking inside a firm is driven by soft information. These costs arise because (i) an incoming agent cannot verify the information set that the outgoing agent utilised, and (ii) neither agent receives the entire marginal benefit/penalty for her effort. We provide evidence of this cost using unique loan and officer level data from a large public sector bank in India. Using the bank's fixed-tenure-based policy of loan officer rotation for identification, we find that default probabilities are 7.5% higher for loans affected by job rotation when compared to other loans. This difference is not explained by differences in hard information or the loss of a lending relationship.

Bankruptcy Codes and Innovation

Review of Financial Studies, 2009

We argue that when bankruptcy code is creditor friendly, excessive liquidations cause levered fir... more We argue that when bankruptcy code is creditor friendly, excessive liquidations cause levered firms to shun innovation, whereas by promoting continuation upon failure, a debtor-friendly code induces greater innovation. We provide empirical support for this claim by employing ...

Review of Financial Studies, 2013

We show that wrongful discharge laws-laws that protect employees against unjust dismissal-spur in... more We show that wrongful discharge laws-laws that protect employees against unjust dismissal-spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of holdup , these laws enhance employees' innovative efforts and encourage firms to invest in risky, but potentially mould-breaking, projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across the U.S. states.

Journal of Financial Economics, 2013

We document empirical support for a key micro-level channel-innovation by young, private firms-th... more We document empirical support for a key micro-level channel-innovation by young, private firms-through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.

The Journal of Law and Economics, 2013

When contracts are incomplete, dismissal laws prevent employers from arbitrarily discharging empl... more When contracts are incomplete, dismissal laws prevent employers from arbitrarily discharging employees and thereby limit employers' ability to hold up innovating employees after an innovation is successful. Therefore, dismissal laws can enhance employees' innovative efforts and encourage firms to invest in risky but potentially groundbreaking projects. Other forms of labor laws that do not affect dismissal of employees do not have this bright side. We find support for these predictions in empirical tests that exploit country-level changes in dismissal laws in the United States, the United Kingdom, France, and Germany: more stringent dismissal laws foster innovation, particularly in innovation-intensive industries, but other labor laws do not. We are grateful to Sam Peltzman (the editor), an anonymous referee, Amit Seru, and Vikrant Vig for valuable comments and suggestions. We would like to thank Anusha Chari, Rich Mathews, Amalia R. Miller, and Radha Iyengar for their insightful discussions. Furthermore, we would like to thank seminar and conference participants at the

Derivation of E’s payoff at date 1.5 If the project fails, the payoff equals zero, which leads to... more Derivation of E’s payoff at date 1.5 If the project fails, the payoff equals zero, which leads to no motivation for F to hold up E. Now, consider the case when the project is successful. If F can successfully fire E, then F ’s outside option by producing with E ′ equals A (given competitive labor markets, F gets the entire payoff in its bargaining with E′). If F cannot fire E, then F ’s outside option equals zero. Since F can fire E successfully with probability (1 − µ) , the expected value of F ’s outside option equals (1 − µ)A. Since E cannot produce without F, E’s outside option is always zero. Using 50:50 Nash bargaining, it follows that E’s payoff at date 1.5 equals 0.5µA. Lemma The optimal project maximizes the aggregate payoff of firm and employee.

thank Hanh Le and Chandrasekhar Mangipudi for excellent research assistance. Labor Laws and Innov... more thank Hanh Le and Chandrasekhar Mangipudi for excellent research assistance. Labor Laws and Innovation Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.

5-2018 Dismissal Laws , Innovation and Economic Growth

I theoretically and empirically show that dismissal laws laws that impose hurdles on firing of em... more I theoretically and empirically show that dismissal laws laws that impose hurdles on firing of employees spur innovation and thereby economic growth. Theoretically, dismissal laws make it costly for firms to arbitrarily discharge employees. This enables firms to commit to not punish short-run failures of employees. Because innovation is inherently risky and employment contracts are incomplete, dismissal laws enable such commitment. Specifically, absent such laws, firms cannot contractually commit so ex-ante. The commitment provided by dismissal laws encourages employees to exert greater effort in risky, but path-breaking, projects thereby fostering firm-level innovation. I provide empirical evidence supporting this thesis using the discontinuity provided by the passage of the federal Worker Adjustment and Retraining Notification Act. Using the fact that this Act only applied to firms with 100 or more employees, I undertake difference-indifference and regression discontinuity tests t...

The Journal of Law and Economics, 2018

Using unique borrower-level data, we study the causal effect of debt relief on the loan performan... more Using unique borrower-level data, we study the causal effect of debt relief on the loan performance of distressed and nondistressed borrowers. We employ a regression discontinuity design that exploits exogenous cutoff dates underlying the 2008 Indian debt waiver program to separate defaulters on loans into beneficiaries and nonbeneficiaries of waivers. By identifying distress before the waiver program using exogenous borrower-level shocks, we examine performance on loans originated after the waiver program. Loan performance of nondistressed beneficiaries worsens, while that of distressed borrowers improves. While existing studies aggregate the effects of debt relief across distressed and non distressed borrowers, we highlight crucial differences between them. We would like to thank Dhammika Dharmapala and two anonymous referees for their thoughtful feedback.

Agency Costs of CEO Turnover in Banks: Evidence Using Exogenous Turnovers

SSRN Electronic Journal, 2015

We examine the effects of chief executive officer (CEO) turnover in banks. Incoming bank CEOs fac... more We examine the effects of chief executive officer (CEO) turnover in banks. Incoming bank CEOs face problems of information asymmetry because banks’ operations are opaque and bank risk can change dramatically in a short time. These CEOs may therefore change bank policies to manage their personal risks. Since CEO turnover is usually endogenous, we utilize a setting in which CEO turnover is based solely on retirement age and is thus exogenous to bank performance. Consistent with our thesis, incoming CEOs increase provisioning for future delinquencies and shrink lending. Bank stock prices decline following these changes. Politically motivated lending or ever-greening cannot explain our results.

The Color of Money: A Startup's Choice Among Venture Capitalists

SSRN Electronic Journal, 2012

Abstract: Venture Capitalists (VCs) differ significantly from one another with respect to the non... more Abstract: Venture Capitalists (VCs) differ significantly from one another with respect to the non-financial resources--from business expertise to the network of contacts with potential suppliers, customers, employees and IPO underwriters--they offer their portfolio firms. In ...

How Do Firm Capabilities Affect Their Boundary Decisions?: Theory and Evidence

SSRN Electronic Journal, 2004

I would like to thank my advisors – Marianne Bertrand, Wouter Dessein, Milton Harris, Raghuram Ra... more I would like to thank my advisors – Marianne Bertrand, Wouter Dessein, Milton Harris, Raghuram Rajan and especially Luigi Zingales for their encouragement, support and guidance and participants at the University of Chicago workshop on Theory of Organizations and the Corporate ...

SSRN Electronic Journal, 2011

Is privatization in a country related to the stringency of its employment protection laws (EPLs)-... more Is privatization in a country related to the stringency of its employment protection laws (EPLs)-and, if so, how? We address these questions using privatization deals in 14 European countries over 3 decades and the changes in EPLs in a country. Using traditional difference-indifferences tests exploiting major changes and generalized difference-indifferences tests for the full sample, we find that stringent EPLs discourage privatization. For identification, we use two sets of triple-difference tests that control for country-level omitted variables using fixed effects for each country-year pair. First, using cross-sectional differences across industries in a country, we find that the effect of EPLs on privatization is disproportionately greater in industries in which separation rates and relocation rates are higher. Second, using productivity measures for US industries as an instrument, we find that the effect of EPLs on privatization is disproportionately greater in less productive industries.

SSRN Electronic Journal, 2012

We investigate Project Finance as a private response to ine¢ ciencies created by weak legal prote... more We investigate Project Finance as a private response to ine¢ ciencies created by weak legal protection of outside investors. We o¤er a new illustration that law matters by demonstrating that for large investment projects, Project Finance provides a contractual and organizational substitute for investor protection laws. Project Finance accomplishes this by making cash ‡ows veri…able, thereby enhancing debt capacity. Two features of Project Finance make cash ‡ows veri…able: (i) contractual arrangements made possible by structuring the Project Company as a single, discrete project legally separate from the sponsor; and (ii) private enforcement of these contracts through a network of project accounts that ensures lender control of project cash ‡ows. Comparing the incidence of bank loans for Project Finance with regular corporate loans for large investments ("Corporate Debt Finance"), we show that Project Finance is more likely in countries with weaker laws against insider stealing and weaker creditor rights in bankruptcy. Our identi…cation relies on di¤erence-in-di¤erence tests that exploit exogenous country-level changes in legal rules.

SSRN Electronic Journal, 2014

We investigate the effect of education on voting preferences using actual voting records from the... more We investigate the effect of education on voting preferences using actual voting records from the Indian elections. We proxy differences in the educational levels of voters using minimum educational qualifications required for a particular category of voters. Using panel regressions that provide explanatory power of almost 100%, we find that educated voters exhibit progressive preferences. Compared to general voters, educated voters' support is 20% lower for heinous criminals, 20% lower for the corrupt, and 13% more for females. Surprisingly, while general voters differ from educated voters in supporting dubious candidates, both general and educated voters prefer women candidates.

SSRN Electronic Journal, 2013

We examine the effect of CEO turnover on earnings management in banks using exogenous variation g... more We examine the effect of CEO turnover on earnings management in banks using exogenous variation generated by age-based retirement policies in Indian public sector banks. Banks experiencing CEO turnover report 23% lower profit-to-sales and 22% lower return-on-assets in the transition quarter. Increased provisions lead to these decreases though they do not associate with subsequent increases in non-performing assets. Shorter CEO tenure exacerbates earnings management by the incoming CEO. The real effects of earnings management are highlighted by a 1.7% decrease in lending and a 1.5% decrease in the stock price. None of these effects manifest for other public sector firms. Personal risk management accounts for earnings management by incoming bank CEOs.

SSRN Electronic Journal, 2012

Does deregulation of bank entry enhance bank stability or exacerbate bank fragility? Theoreticall... more Does deregulation of bank entry enhance bank stability or exacerbate bank fragility? Theoretically, the effect of deregulation of bank entry on bank failures is ambiguous. Using the deregulation of entry restrictions in the U.S. states, we show that deregulation enhances bank stability by lowering instances of bank failures. Placebo effects do not account for our results: the deregulation had no effect on thrift failures. Preexisting bank failures in a state did not determine its timing of deregulation, which assures against reverse causal effects. The benefits of deregulation are strongest in environments where market structure changed the most and stem from geographical diversification, operating efficiencies and reduced loan losses.

SSRN Electronic Journal, 2012

We estimate the value of innovative assets of private, innovative firms. Since young, private fir... more We estimate the value of innovative assets of private, innovative firms. Since young, private firms are the primary drivers of mold-breaking innovation, we focus on such firms. We adopt a novel approach that uses the price paid in the market for acquisitions of young, private targets and combine it with unique data hand-collected from Google Patents. We minimize systematic biases by comparing across deals undertaken within the same year by the serial acquirer Cisco Systems, whose processes for acquisitions are quite fine-tuned. To alleviate concerns about external validity, we cross-check the estimates obtained using Cisco's acquisitions with those undertaken by Yahoo and Google. We find order-ofmagnitude higher estimates for the value of patents when compared to existing studies. Apart from the intellectual property rights provided by patents, the value of a portfolio of innovative assets increases with the expertise underlying the assets as measured using citations to patents. Finally, consistent with intangible assets having a value that is contextspecific, we find that the value of the target's innovative assets increases when these assets overlap more with the acquirer's assets and with the assets of the acquirer's competitors. Apart from contributing to the literature on valuing innovative assets, ours is the first study to value innovative assets in mergers and acquisitions.

SSRN Electronic Journal, 2011

Though public infrastructure-physical and financial-is widely believed to play a critical role in... more Though public infrastructure-physical and financial-is widely believed to play a critical role in attracting Foreign Direct Investment (FDI), identifying this effect remains a challenge. In this paper, we use unique data to identify this effect by exploiting purely cross-sectional variation among approximately 600 districts in India. We examine the effect of infrastructure in 2001 on cumulative FDI flows into the district during 2002-07. Using panel regressions that include state fixed effects, we employ a two-pronged identification strategy. First, we test by netting out average (and maximum) FDI inflows into surrounding districts. Second, we exploit variation among different sectors within a district depending upon the sector's propensity to attract FDI. Since our variables vary primarily at the district level, these tests together control for all omitted variables at the district level. Surprisingly, we find that FDI inflows remain insensitive to changes in infrastructure till a threshold is reached; thereafter, FDI inflows increase steeply with an increase in infrastructure.

SSRN Electronic Journal, 2011

We develop a theory to show how external and internal corporate governance mechanisms affect inno... more 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.

SSRN Electronic Journal, 2013

We highlight the costs from a principal rotating agents among tasks when decisionmaking inside a ... more We highlight the costs from a principal rotating agents among tasks when decisionmaking inside a firm is driven by soft information. These costs arise because (i) an incoming agent cannot verify the information set that the outgoing agent utilised, and (ii) neither agent receives the entire marginal benefit/penalty for her effort. We provide evidence of this cost using unique loan and officer level data from a large public sector bank in India. Using the bank's fixed-tenure-based policy of loan officer rotation for identification, we find that default probabilities are 7.5% higher for loans affected by job rotation when compared to other loans. This difference is not explained by differences in hard information or the loss of a lending relationship.

Bankruptcy Codes and Innovation

Review of Financial Studies, 2009

We argue that when bankruptcy code is creditor friendly, excessive liquidations cause levered fir... more We argue that when bankruptcy code is creditor friendly, excessive liquidations cause levered firms to shun innovation, whereas by promoting continuation upon failure, a debtor-friendly code induces greater innovation. We provide empirical support for this claim by employing ...

Review of Financial Studies, 2013

We show that wrongful discharge laws-laws that protect employees against unjust dismissal-spur in... more We show that wrongful discharge laws-laws that protect employees against unjust dismissal-spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of holdup , these laws enhance employees' innovative efforts and encourage firms to invest in risky, but potentially mould-breaking, projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across the U.S. states.

Journal of Financial Economics, 2013

We document empirical support for a key micro-level channel-innovation by young, private firms-th... more We document empirical support for a key micro-level channel-innovation by young, private firms-through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.

The Journal of Law and Economics, 2013

When contracts are incomplete, dismissal laws prevent employers from arbitrarily discharging empl... more When contracts are incomplete, dismissal laws prevent employers from arbitrarily discharging employees and thereby limit employers' ability to hold up innovating employees after an innovation is successful. Therefore, dismissal laws can enhance employees' innovative efforts and encourage firms to invest in risky but potentially groundbreaking projects. Other forms of labor laws that do not affect dismissal of employees do not have this bright side. We find support for these predictions in empirical tests that exploit country-level changes in dismissal laws in the United States, the United Kingdom, France, and Germany: more stringent dismissal laws foster innovation, particularly in innovation-intensive industries, but other labor laws do not. We are grateful to Sam Peltzman (the editor), an anonymous referee, Amit Seru, and Vikrant Vig for valuable comments and suggestions. We would like to thank Anusha Chari, Rich Mathews, Amalia R. Miller, and Radha Iyengar for their insightful discussions. Furthermore, we would like to thank seminar and conference participants at the

Derivation of E’s payoff at date 1.5 If the project fails, the payoff equals zero, which leads to... more Derivation of E’s payoff at date 1.5 If the project fails, the payoff equals zero, which leads to no motivation for F to hold up E. Now, consider the case when the project is successful. If F can successfully fire E, then F ’s outside option by producing with E ′ equals A (given competitive labor markets, F gets the entire payoff in its bargaining with E′). If F cannot fire E, then F ’s outside option equals zero. Since F can fire E successfully with probability (1 − µ) , the expected value of F ’s outside option equals (1 − µ)A. Since E cannot produce without F, E’s outside option is always zero. Using 50:50 Nash bargaining, it follows that E’s payoff at date 1.5 equals 0.5µA. Lemma The optimal project maximizes the aggregate payoff of firm and employee.