Unintended consequences of compensation peer groups on corporate innovation |
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| Affiliation: | 1. Research Center of Finance, Shanghai Business School, Shanghai, China;2. Department of Finance, College of Commerce, National Chengchi University, 64, Section 2, ZhiNan Rd., Taipei City, Taiwan;3. School of Economics, Utrecht University, Utrecht, The Netherlands;4. CEPR, London, United Kingdom;1. University of Sheffield, United Kingdom;2. University of Edinburgh, United Kingdom;1. RB 239A, Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199, United States of America;2. Finance and accounting Area, Indian Institute of Management, Indore, India;1. Monetary and Economic Department, Bank for International Settlements, Basel, Switzerland;2. Finance Department, School of Business Administration, American University of Sharjah, PO Box 26666, Sharjah, United Arab Emirates;3. Department of Economics and Finance, Brunel University London, Uxbridge, Middlesex UB8 3PH, UK |
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| Abstract: | When companies select and use compensation peers to determine chief executive officer (CEO) compensation, they create unintended peer effects on corporate innovation due to the similarities between these companies and their compensation peers in terms of product markets, CEO characteristics, and compensation schemes. After controlling for industry and geography peer groups, the findings confirm that the average innovation activity of compensation peers is a significant and distinct predictor of corporate innovation. Further analysis showed that (1) the peer effect is stronger in firms and compensation peers that pay their CEOs using long-term compensation, in firms with stronger labor market competition and board monitoring, and in peer companies that experience higher innovation competition and are closer to the median peer company in the peer group; (2) the obtained results are likely not attributable to the knowledge spillover mechanism and are more consistent with the peer pressure mechanism; and (3) the Securities and Exchange Commission's 2006 executive compensation disclosure rules may have generated peer effects. |
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