ABSTRACT We develop a cost–benefit tradeoff that provides new insights into the frequency with which firms should be required to report the results of their operations to the capital market. The benefit to increasing the frequency of financial reporting is that it causes market prices to better deter investments in negative net present value projects. The cost of increased frequency is that it increases the probability of inducing managerial short‐termism. We analyze the tradeoff between these costs and benefits and develop conditions under which greater reporting frequency is desirable and conditions under which it is not.

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.