Wrongful Discharge Laws and Innovation

Abstract

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 hold-up, 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.

Corporate Governance and Innovation: Theory and Evidence

“…Acharya and Subramanian (2009) find that debtorfriendly bankruptcy laws foster innovation and economic growth, and Acharya, Baghai, and Subramanian (2014) argue theoretically and provide empirical evidence that laws that impose restrictions on dismissal of employees encourage innovation and entrepreneurship. Acharya and Subramanian (2009) find that debtorfriendly bankruptcy laws foster innovation and economic growth, and Acharya, Baghai, and Subramanian (2014) argue theoretically and provide empirical evidence that laws that impose restrictions on dismissal of employees encourage innovation and entrepreneurship.…”

Does governmental venture capital spur invention and innovation? Evidence from young European biotech companies

“…While the association between patents and invention is widely accepted in the literature, the question is whether patents can also be linked to innovations. Albeit several papers use simple patent counts as a measure of innovation (most recently, e.g., Acharya et al, 2014;Cao et al, 2013), some authors argue that a patent reflects an invention rather that an innovation because many patents are not successfully exploited in terms of a commercial use and, hence, do not qualify as innovations.…”

Should Directors Have Term Limits? – Evidence from Corporate Innovation

“…After excluding observations with missing data, my final sample consists of 7706 firm-year observations. 4 Prior studies have examined various market and firm characteristics that affect innovation, including the participation of venture capital (Kortum & Lerner, 2000;Tian & Wang, 2014), especially corporate venture capital (Chemmanur, Loutskina, & Tian, 2014), CEO overconfidence (Hirshleifer, Low, & Teoh, 2012), analyst coverage (He & Tian, 2013), private ownership (Ferreira, Manso, & Silva, 2014), involvement of institutional investors (Aghion, Van Reenen, & Zingales, 2013;Ferreira et al, 2014), conglomerate form (Seru, 2014), competition (Aghion, Bloom, Blundell, Griffith, & Howitt, 2005), stock liquidity (Fang et al, 2014), debtor-friendly legal environments (Acharya & Subramanian, 2009), stringent labor laws and lower union powers (Acharya, Baghai, & Subramanian, 2013;Bradley, Kim, & Tian, in press), and financial market development (Hsu, Tian, & Xu, 2014). 5 The sample period starts in 1996 because it's the first year that director data become available in the RiskMetrics database.…”