In the paper, Corporate Governance and Innovation, which was recently made publicly available on SSRN, we examine the effect of corporate governance on innovation as measured by firm research and development (R&D) expenditures. Two different perspectives dominate the academic literature on corporate governance. One perspective emphasizes principal-agent problems and suggests that executives who are protected from shareholder pressure become entrenched. Entrenched executives pursue their own interests at the expense of shareholders. If executives prefer less-risky corporate strategies then an entrenched executive might reduce risky R&D expenditures. An alternative perspective emphasizes that the threat of takeovers forces executives to focus on short-term results so long-term investments such as R&D may suffer. An executive concerned about a takeover threat may reduce R&D expenditures, which are not expensed, to increase short-term profits and stock prices to discourage a hostile takeover. This perspective suggests that entrenched executives who are free from the pressure of hostile takeovers may pursue more R&D expenditures.

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