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Wrongful Discharge Laws and Innovation

Author Info

  • Viral V. Acharya
  • Ramin P. Baghai
  • Krishnamurthy V. Subramanian

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 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 U.S. states. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 27 (2014)
Issue (Month): 1 (January)
Pages: 301-346

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Handle: RePEc:oup:rfinst:v:27:y:2014:i:1:p:301-346
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Find related papers by JEL classification:
  • G3 - Financial Economics - - Corporate Finance and Governance
  • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
  • J8 - Labor and Demographic Economics - - Labor Standards
  • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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  25. repec:fth:harver:1473 is not listed on IDEAS
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Cited by:

  1. Viral V. Acharya & Zhaoxia Xu, 2013. "Financial Dependence and Innovation: The Case of Public versus Private Firms," NBER Working Papers 19708, National Bureau of Economic Research, Inc.
  2. John T. Addison & Paulino Teixeira & Katalin Evers & Lutz Bellmann, 2015. "Collective Bargaining and Innovation in Germany: Cooperative Industrial Relations?," GEMF Working Papers 2014-01, GEMF - Faculdade de Economia, Universidade de Coimbra.
  3. Seru, Amit, 2014. "Firm boundaries matter: Evidence from conglomerates and R&D activity," Journal of Financial Economics, Elsevier, vol. 111(2), pages 381-405.
  4. Hsu, Po-Hsuan & Tian, Xuan & Xu, Yan, 2014. "Financial development and innovation: Cross-country evidence," Journal of Financial Economics, Elsevier, vol. 112(1), pages 116-135.

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