Premium
CEO Incentives and Corporate Innovation
Author(s) -
Nguyen Tu
Publication year - 2018
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12144
Subject(s) - incentive , endogeneity , business , industrial organization , competition (biology) , product market , product (mathematics) , market for corporate control , monetary economics , corporate governance , microeconomics , economics , finance , econometrics , shareholder , ecology , geometry , mathematics , biology
Using scaled wealth‐performance sensitivity as my measure of Chief Executive Officer (CEO) incentives, and utilizing cross‐sectional variations in industry innovativeness, product market competition and firms’ degree of exposure to the market for corporate control for identification purposes, I find that higher long‐term incentives that stem from CEO holdings of unvested options are associated with greater subsequent corporate innovation in innovative industries, competitive product markets, and firms more exposed to the threat of hostile takeovers, that is, exactly where incentivizing innovation is a matter of necessity. I address the endogeneity concerns with systems of simultaneous equations estimated using three‐stage least squares. A possible channel for the observed relation between unvested options‐based incentives and subsequent corporate innovation is that these incentives encourage managers to undertake riskier projects to achieve long‐term economic benefits.