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FMG-7: Finance and Institutions
The Impact of Institutions on Innovation
1University of Mannheim; 2London Business School
This paper studies the impact of inclusive institutions on innovation. We use the timing and geography of the French occupation of different regions of Germany after the 1789 French Revolution as an exogenous shock to the institutions of those regions. Using a novel county-level data set for Imperial Germany, we show that a significantly higher number of patents per capita was generated in counties whose institutions had become more inclusive as a result of the French occupation. In counties with longest occupation and therefore deeper institutional reforms, the number of patents per capita more than doubled compared to unoccupied counties. Consistent with the view that institutions do not operate in isolation, we find that favorable social norms and local financial development are complementary to institutions as inputs in the production of innovation. Our results are not driven by differences in local economic development, market integration, and human capital. Our findings point to innovation as a key mechanism through which institutions may generate economic growth.
Creditor Rights and Entrepreneurship: Evidence from Fraudulent Transfer Law
1University of Illinois at Urbana-Champaign; 2NYU Stern School of Business
We examine entrepreneurial activity following the adoption of fraudulent transfer laws in the U.S.. These laws strengthen creditor rights by removing the burden of proof from creditors attempting to claw back funds that were transferred out of failing busi- nesses. These laws are particularly important for entrepreneurs whose personal assets are often commingled with those of the venture. Using establishment-level data from the U.S. Census Bureau, we find significant declines in start-up entry, churning among new entrants, and closures of existing ventures after the passage of these laws. Our findings suggest that strengthening creditor rights can, in some circumstances, impede entrepreneurial activity and slow down the process of creative destruction.
What's in a (School) Name? Racial Discrimination in Higher Education Bond Markets
1Drexel University; 2Notre Dame University; 3Duke University; 4UC San Diego
Historically black colleges and universities (HBCUs) pay higher underwriting fees to issue tax-exempt bonds, compared to similar non-HBCUs. This appears to reflect higher costs of finding willing buyers: the effect is three times larger in the far Deep South, where racial animus remains the most severe. Credit quality plays little role. For example, identical differences are observed between HBCU and non-HBCUs: 1) with AAA ratings, and/or 2) insured by the same company, even before the 2008 Financial Crisis. HBCU-issued bonds are also more expensive to trade in secondary markets, and when they do, sit in dealer inventory longer.
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Conference: EFA 2017
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