Silverback CEOs: Age,experience, and firm value

Approximately half of S&P 1500 firms have adopted policies mandating retirement based on age. This study investigates the merits of CEO mandatory retirement policies (MRPs) using a sample of 12,610 firm-year observations from 2143 unique firms. It also addresses the question of whether CEO age is relevant to the success of an organization. We fail to find consistent evidence that MRPs are intended to limit CEO entrenchment. MRPs are, however, positively associated with CEO age and negatively associated with firm-specific human capital. Further analysis reveals that CEO age is significantly negatively related to firm value, operating performance, and corporate deal-making activity. Splitting our sample according to whether an MRP is in place, we observe that the negative impact of age exists only for those firms which do not have MRPs. We therefore conclude that MRPs represent an effective form of firm governance designed to mitigate the underperformance of older CEOs.     

Pilot CEOs and corporate innovation

We find evidence that chief executive officers’ (CEOs’) hobby of flying airplanes is associated with significantly better innovation outcomes, measured by patents and citations, greater innovation effectiveness, and more diverse and original patents. We rule out alternative explanations, leading us to conclude that CEO pilot credentials capture the personality trait of sensation seeking. Sensation seeking combines risk taking with a desire to pursue novel experiences and has been associated with creativity. Our evidence highlights sensation seeking as a valuable personality trait that can be used to identify CEOs who are likely to drive innovation success.     

Powerful CEOs,cash bonus contracts and firm performance

We investigate whether powerful chief executive officers (CEOs) influence the conditions of their cash bonus contracts. Specifically, we examine (i) the association between CEO power and the proportion of ex-ante cash bonus to base salary (bonus ratio), (ii) the association between CEO power and the relative use of non-financial to financial performance targets in cash bonus contracts, and (iii) the performance consequences of incorporating non-financial targets in cash bonus contracts. Results show that powerful CEOs are associated with greater ex-ante bonus ratios and higher proportions of non-financial performance targets compared to less powerful CEOs. Furthermore, the use of quantitative and corporate social responsibility (CSR)-related non-financial performance targets is positively associated with subsequent firm performance, and the use of undefined non-financial performance targets is negatively associated with subsequent firm performance. These results are robust to alternative econometric specifications and variable definitions.     

Employee approval of CEOs and firm value: Evidence from Employees' choice awards

Using Glassdoor's list of “Top CEOs by Employees' Choice,” we adopt a regression discontinuity (RD) specification to establish a causal link between the employee approval of CEOs and firm value. Having a CEO included in the top list results in an increase in firm performance in both stock returns and return on assets. Having a top CEO significantly increases a firm's employee efficiency, attraction to future employees, hiring of high-quality laborers such as inventors, and attraction to the customers. Our findings establish that the CEO-employee relationship is an important, though intangible, component of a corporation, and we emphasize the critical role of perceived corporate culture in the spirit of Guiso et al. (2015).     

Employee treatment and firm innovation

We identify firm innovation as a channel through which the treatment of employees affects firm value. Long‐term incentive theory supports positive effects of ‘good’ employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since human capital is increasingly essential to the growth and success of a firm. Using the KLD database and patent/citation data, we find a significant positive relationship between favorable employee treatment and the innovation quantity and quality of a firm. Furthermore, we find that the positive treatment of employees improves innovation focus – more innovation related to firms’ core business, leading to greater firm value via the increased economic value of patents. These findings, robust to endogeneity concerns, provide support for the long‐term incentive hypothesis, suggesting that well‐treated employees increase firm innovation. Thus, firm innovation represents a channel through which positive employee treatment enhances firm value.     

Style investing and firm innovation

We document that transient, dedicated and quasi-indexed institutional investors exhibit a high degree of within-group heterogeneity with respect to their investment styles (i.e., growth, value, and balanced). We find that growth institutional investors enhance firm innovation in terms of R&D expenditures, R&D intensity, quantity and quality of patents and patent radicalness while value institutional investors impede innovation. Balanced investors have no significant association with innovation. Findings are consistent with style investing literature that growth and value styles are substitutes. Using investment styles, we present evidence that reconcile literature’s mixed findings on how transient and dedicated investors affect R&D and innovation, and why quasi-indexed investors, the largest group among all investors, have an insignificant effect. We also show that the effect of institutional investors depends on the firm’s relative level of innovativeness.     

Threat of termination and firm innovation

This study investigates how the ex-ante threat of termination affects firm performance in innovation measured by number of patents and citations. Empirical results show that the threat of termination is negatively associated with both measures of firm innovation. This relation however is sensitive to industry structure. The negative effect of the threat of termination on innovation is statistically significant only for high-tech firms. For low-tech firms there is no statistically significant relation between the threat of termination and firm innovation. One plausible explanation is that high-tech firms are inherently risky and have higher rates of project failure. Adding the risk of higher threat of termination makes the manager more risk averse and forces her to avoid investing in value increasing innovations. Managers in low-tech firms don’t face such pressures. The policy implication is that high-tech firms should lower threat of termination and increase tolerance for project failure to encourage innovation.     

Innovation beyond firm boundaries: Strategic alliances and corporate innovation

In this paper, we empirically analyze how strategic alliances affect the innovation output of the firms forming the alliance. We find a positive effect of R&D-related strategic alliances on corporate innovation, as measured by the quantity and quality of patents filed. This effect is stronger for firms led by CEOs with higher general managerial skills, firms with greater experience from earlier alliances, and firms operating in R&D-intensive industries. Furthermore, the innovation-fostering effect of strategic alliances is more pronounced if alliance partnering firms share a common institutional blockholder or have a higher degree of technological proximity. We also document, for the first time in the literature, a unique contractual mechanism through which firms share the benefits of innovation with their alliance partners, namely, “co-patenting.”     

Institutional investor networks and firm innovation: Evidence from China

We examine the impact of institutional investor networks on firm innovation in China. Employing the unexpected departure of mutual fund managers and the inclusion of the Shanghai-Shenzhen 300 index as identifications, we find that institutional investor networks have a positive impact on firm innovation. Specifically, firms that are hold by well-connected institutional investors are motivated to make R&D investments and receive greater patents than their counterparts. This positive influence is more pronounced for non-SOEs and for firms located in less-developed regions, indicating that institutional investor networks act as information flow facilitator and a value certifier to encourage innovation activities.     

Carrying on the family's legacy: Male heirs and firm innovation

We predict that entrepreneurs are more likely to have a long-term orientation to their decision making if they have male heirs, because traditionally sons, not daughters, have been expected to carry on the family business. Our results support this prediction. Specifically, we find that when entrepreneurs have at least one son, have more sons, and have a firstborn son, their firms are more innovative. The results are robust to a battery of robustness tests, including alternative measures of innovation, instrumental variable approach, and Heckman two-step correction for selection bias. Our further analyses show that the positive association between male heirs and firm innovation is stronger for entrepreneurs with a greater son preference and is weaker for entrepreneurs who more impacted by the one-child policy.     

Patent rights,innovation, and firm exit

We study the causal impact of patent invalidation on subsequent innovation and exit by patent holders. The analysis uses patent litigation data from the US Federal Circuit Court and exploits random allocation of judges to control for endogeneity of the decision. Invalidation causes patent holders to reduce patenting over a five‐year window by 50% on average, but the effect is heterogeneous. The impact is large for small‐ and medium‐sized firms, particularly where they face many large competitors, and for patents central to their research portfolio. We find no significant effect for large firms. Invalidation also increases exit from patenting by small firms.     

Reverse innovation and firm value in emerging markets: Evidence from China

Reverse innovation (RI) patents, which apply to intellectual property that is created in an emerging country but patented in a developed country, are better representatives of innovation value than domestic patents in emerging economies. We argue that RI patents contribute to firm value by proxying for the private value of innovation, generating product market value, and signalling firms’ capabilities. Using a sample of Chinese-listed companies, we find RI patents positively relate to firms’ short- and long-term market value. This effect is stronger for firms with high innovative intensity and managerial ability. We also explore the mechanisms behind the relationship between RI and firm value. We demonstrate that, in addition to the domestic patent functions of creating value and capturing innovation rent, RI patents can further leverage firm value by signalling firm quality to customers and investors in developed markets, a function that is unique to RI patents.     

Family involvement,family member composition and firm innovation

Based on the data of Chinese listed family firms from 2008 to 2016, we investigate the impact of family involvement on firm innovation and the moderating effect of family member composition. The results show that increased family involvement significantly reduces R&D investment intensity and the number of patent applications. With the increased richness of the kinship of family members involved in management, the negative impact of family involvement on patent applications is weakened, but family member composition does not have a significant moderating effect on the relationship between family involvement and R&D investment intensity. Further analysis shows that the number of invention patent applications decreases as the degree of family involvement increases, but family involvement has no significant effect on utility model patent and design patent applications. Family member composition has a significant moderating effect on the relationship between family involvement and invention patent applications. The results have value as a reference for exploring how family involvement affects firm innovation and can also help the actual controller to take effective measures to optimize family member composition and improve the innovation performance of family firms.     

The undesirable effect of audit quality: Evidence from firm innovation

This study examines whether and how audit quality affects a firm's technological innovation. Using a sample of 7,482 U.S. firms between 2000 and 2009, we demonstrate that high audit quality is associated with lower innovation output, measured by patent counts and patent citations. The effect remains valid after a series of tests for endogeneity issues, alternative measures of audit quality, and different subsamples. We also find that firms with high audit quality attract more non-dedicated institutional investors and financial analysts, who often exert excessive pressure on managers for short-term performance. These pressures, in turn, exacerbate managerial myopia and lead them to forgo investments in innovation. Our findings provide new insights into audit quality by showing its undesirable, most likely unintended, consequences.     

Financial development,government ownership of banks and firm innovation

Using a newly-available World Bank survey of over 28,000 firms from 46 countries, we examine how financial development affects firm innovation around the world. We find that while stock market development significantly enhances firm innovation, banking sector development has mixed effects. We show that the latter result can be explained by different levels of government ownership of banks. Specifically, in countries with lower government ownership of banks, banking sector development significantly enhances firm innovation; while in countries with higher government ownership of banks, banking sector development has no significant or sometimes even significantly negative effects on firm innovation. Such negative effects are significantly stronger for smaller firms. The results are robust to various controls such as firms’ human capital and ownership structure, to estimations using instrumental variable techniques and alternative measures of firm innovation.     

Integrating corporate social responsibility criteria into executive compensation and firm innovation: International evidence

Using a large sample of firms from 30 countries, we find that the integration of corporate social responsibility (CSR) criteria into executive compensation is associated with greater innovation output in countries around the world. We also find that this positive association is stronger in countries with weak stakeholder orientation, countries with weak legal environments, and countries without mandatory CSR reporting requirements. These findings suggest that CSR contracting can compensate for institutional voids and high stakeholder demand for CSR, and thereby foster firm innovation. The results of the channel analyses suggest that a greater level of employee innovation productivity, enhanced managerial risk-taking, and greater responsiveness of firms' R&D investment to their investment opportunities play a significant role in the association between CSR contracting and innovation. Overall, our study demonstrates in a global context the importance of linking executive compensation to nonfinancial criteria in addition to financial criteria, and it documents the heterogeneity in the effect of CSR contracting on firm innovation in different countries.     

The bright side of co‐opted boards: Evidence from firm innovation

This study documents a positive and robust effect of co‐opted boards on firm innovation. This effect is mainly driven by co‐opted independent directors. Firms with more co‐opted independent directors are associated with lower sensitivities of CEO pay and turnover to performance. It suggests that co‐opted boards promote innovation by insulating managers’ career concerns from innovation risk and supporting incentive contracts that motivate innovation. Overall, our study provides new evidence on co‐opted boards benefiting firm innovation.     

CEOs versus CFOs: Incentives and corporate policies

We undertake a broad-based study of the effect of managerial risk-taking incentives on corporate financial policies and show that the risk-taking incentives of chief executive officers (CEOs) and chief financial officers (CFOs) significantly influence their firms’ financial policies. In particular, we find that CEOs’ risk-decreasing (-increasing) incentives are associated with lower (higher) leverage and higher (lower) cash balances. CFOs’ risk-decreasing (-increasing) incentives are associated with safer (riskier) debt-maturity choices and higher (lower) earnings-smoothing through accounting accruals. We exploit the stock option expensing regulation of 2004 to establish a causal link between managerial incentives and corporate policies. Our findings have important implications for optimal corporate compensation design.     

Old captains at the helm: Chairman age and firm performance

This paper examines whether the chairmen of the boards (COBs) impose their life cycles on the firms over which they preside. Using a large sample of unlisted firms, we find a robust negative relation between COB age and firm performance. COBs age much like ‘ordinary’ people. Their cognitive abilities deteriorate, and they experience significant shifts in motivation. Deteriorating cognitive abilities are the main driver of the performance effect that we observe. The results imply that succession planning problems in unlisted firms are real. Mandatory retirement age clauses cannot solve these problems.     

CFOs versus CEOs: Equity incentives and crashes

Using a large sample of U.S. firms for the period 1993-2009, we provide evidence that the sensitivity of a chief financial officer's (CFO) option portfolio value to stock price is significantly and positively related to the firm's future stock price crash risk. In contrast, we find only weak evidence of the positive impact of chief executive officer option sensitivity on crash risk. Finally, we find that the link between CFO option sensitivity and crash risk is more pronounced for firms in non-competitive industries and those with a high level of financial leverage.