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Corporate Governance and CEO Innovation

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Abstract

A fundamental concern emerging from the corporate literature is the agency problem of innovation. While innovation is considered as a major driver of corporate growth and profitability, the Chief Executive Officer (CEO) has an intrinsic reluctance to pursue innovation projects. The thrust of this paper is to identify the mechanisms of corporate governance which help attenuate this problem, thereby encouraging the CEO to have the propensity to innovate. The empirical results suggest that firms with a widespread dispersion of shares among shareholders are less likely to encourage the CEO to innovate. The likelihood of innovation appears to increase, however, in the presence of a large shareholder. Contrary to prevailing beliefs, there appears to be no association between innovation and board independence. The same result holds for board size. Also, a diverse board appears to negate CEO predisposition to innovate. On the other hand, innovation increases when the CEO is not the Board Chair but has equity ownership, although the incentive effect is economically small. The paper uses a sample of domestically-owned, publicly-listed Australian firms over the period 1994–2003.

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Acknowledgements

I would like to thank the managing editor and anonymous reviewers for their insightful comments and editorial feedback which greatly improved the paper.

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Authors and Affiliations

  1. Department of Economics, Judd Leighton School of Business and Economics, Indiana University South Bend, 1700 Mishawaka Avenue, South Bend, IN, 46634-7111, USA

    Vicar S. Valencia

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Valencia, V.S. Corporate Governance and CEO Innovation. Atl Econ J 46, 43–58 (2018). https://doi.org/10.1007/s11293-017-9563-5

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