Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-26T16:33:14.118Z Has data issue: false hasContentIssue false
  • English
  • Français

Bringing Innovation to Fruition: Insights From New Trademarks

Published online by Cambridge University Press:  08 November 2022

Lucile Faurel Open the ORCID record for Lucile Faurel [Opens in a new window] ,
Qin Li ,
Devin Shanthikumar  and
Siew H. Teoh Open the ORCID record for Siew H. Teoh [Opens in a new window]
Lucile Faurel*
Affiliation:
Arizona State University W. P. Carey School of Business
Qin Li
Affiliation:
Hong Kong Polytechnic University School of Accounting and Finance [email protected]
Devin Shanthikumar
Affiliation:
University of California Irvine Paul Merage School of Business [email protected]
Siew H. Teoh
Affiliation:
University of California Los Angeles Anderson School of Management [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We build a novel comprehensive data set of new product trademarks as an output measure of product development innovation. We show that risk-taking incentives in CEO compensation motivate this type of innovation and that this innovation improves firm performance. Using an exogenous shock to executive compensation, we find that reductions in stock option compensation cause reductions in new product development. We also find that firms undertaking new product development experience increases in future cash flow from operations and return on assets. These findings suggest the importance of product development innovation to firms and new trademarks as a novel innovation measure.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 474 - 520
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

Earlier versions of this article circulated under the titles “Product Development Innovation: Insights from Trademarks,” “CEO Incentives and New Product Development: Insights from Trademarks,” and “CEO Incentives and Product Development Innovation: Insights from Trademarks.” We thank Yoojin Lee and Tiana Lehmer for their research assistance. We also thank Jarrad Harford (the editor), Wenrui Zhang (the referee), workshop participants at Arizona State University, Chapman University, Ohio State University, Pennsylvania State University, Santa Clara University, Southern Methodist University, Stanford University, University of California Davis, University of California Irvine, University of California Riverside, University of Oregon, University of Texas Dallas, University of Toronto, the 2015 AAA Annual Meeting, the 2015 AAA Financial Accounting and Reporting Section Midyear Meeting, the AAA 2015 Managerial Accounting Section Midyear Meeting, the 2014 AAA Western Region Meeting, the 2015MIT Asia Conference, the 2016 Temple Conference on Convergence of Financial and Managerial Accounting, the 2015 UCI/UCLA/USC Conference, the 2015 Utah Winter Accounting Conference, and discussants Thomas Bourveau, Brian Cadman, Christo Karuna, Chen Li, Maria Loumioti, and Volkan Muslu. We gratefully acknowledge financial support from The Don Beall Center for Innovation and Entrepreneurship at the UCI Paul Merage School of Business.

References

Armstrong, C. S.; Larcker, D. F.; Ormazabal, G.; and Taylor, D. J.. “The Relation between Equity Incentives and Misreporting: The Role of Risk-Taking Incentives.” Journal of Financial Economics, 109 (2013), 327–350.CrossRefGoogle Scholar
Armstrong, C. S., and Vashishtha, R.. “Executive Stock Options, Differential Risk-Taking Incentives, and Firm Value.” Journal of Financial Economics, 104 (2012), 70–88.CrossRefGoogle Scholar
Bakke, T.-E.; Mahmudi, H.; Fernando, C. S.; and Salas, J. M.. “The Causal Effect of Option Pay on Corporate Risk Management.” Journal of Financial Economics, 120 (2016), 623–643.CrossRefGoogle Scholar
Baranchuk, N.; Kieschnick, R.; and Moussawi, R.. “Motivating Innovation in Newly Public Firms.” Journal of Financial Economics, 111 (2014), 578–588.CrossRefGoogle Scholar
Beebe, B. “Empirical Studies of Trademark Law.” In Research Handbook on the Economics of Intellectual Property Law, Depoorter, B., Menell, P., and Schwartz, D., eds. Northampton, MA: Edward Elgar Publishing (2019), 617–636.Google Scholar
Bergman, N. K., and Jenter, D.. “Employee Sentiment and Stock Option Compensation.” Journal of Financial Economics, 84 (2007), 667–712.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.CrossRefGoogle Scholar
Block, J. H.; Fisch, C.; and Sandner, P. G.. “Trademark Families: Characteristics and Market Values.” Journal of Brand Management, 21 (2014), 150–170.CrossRefGoogle Scholar
Brown, L. D., and Lee, Y.-J.. “The Relation between Corporate Governance and CEOs’ Equity Grants.” Journal of Accounting and Public Policy, 29 (2010), 533–558.CrossRefGoogle Scholar
Cadman, B. D.; Rusticus, T. O.; and Sunder, J.. “Stock Option Grant Vesting Terms: Economic and Financial Reporting Determinants.” Review of Accounting Studies, 18 (2013), 1159–1190.CrossRefGoogle Scholar
Chang, X.; Fu, K.; Low, A.; and Zhang, W.. “Non-Executive Employee Stock Options and Corporate Innovation.” Journal of Financial Economics, 115 (2015), 168–188.CrossRefGoogle Scholar
Chemmanur, T.; Rajaiya, H.; Tian, X.; and Yu, Q.. “Trademarks in Entrepreneurial Finance.” Working Paper, Boston College (2018).Google Scholar
Chen, Y.; Gul, F. A.; Veeraraghavan, M.; and Zolotoy, L.. “Executive Equity Risk-Taking Incentives and Audit Pricing.” Accounting Review, 90 (2015), 2205–2234.CrossRefGoogle Scholar
Christensen, C. M.; Raynor, M. E.; and McDonald, R.. “What Is Disruptive Innovation?” Harvard Business Review, 93 (2015), 44–53.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Calculation of Compensation Incentives and Firm-Related Wealth Using ExecuComp: Data, Program, and Explanation.” Working Paper, University of Utah (2013).Google Scholar
Core, J., and Guay, W.. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Currim, I. S.; Lim, J.; and Kim, J. W.. “You Get What You Pay For: The Effect of Top Executives’ Compensation on Advertising and R&D Spending Decisions and Stock Market Return.” Journal of Marketing, 76 (2012), 33–48.CrossRefGoogle Scholar
Datta, S.; Iskandar-Datta, M.; and Raman, K.. “Executive Compensation and Corporate Acquisition Decisions.” Journal of Finance, 56 (2001), 2299–2336.CrossRefGoogle Scholar
Dean, J. L. “Five Reasons NOT to Register Your Trademark.” National Law Review, (2017). November 27, 2022 Available at https://www.natlawreview.com/article/five-reasons-not-to-register-your-trademark.Google Scholar
Dechow, P. M., and Sloan, R. G.. “Executive Incentives and the Horizon Problem: An Empirical Investigation.” Journal of Accounting and Economics, 14 (1991), 51–89.CrossRefGoogle Scholar
DeFond, M.; Erkens, D. H.; and Zhang, J.. “Do Client Characteristics Really Drive the Big N Audit Quality Effect? New Evidence from Propensity Score Matching.” Management Science, 63 (2017), 3628–3649.CrossRefGoogle Scholar
Devers, C. E.; McNamara, G.; Wiseman, R. M.; and Arrfelt, M.. “Moving Closer to the Action: Examining Compensation Design Effects on Firm Risk.” Organization Science, 19 (2008), 548–566.CrossRefGoogle Scholar
Erkens, D. H. “Do Firms Use Time-Vested Stock-Based Pay to Keep Research and Development Investments Secret?” Journal of Accounting Research, 49 (2011), 861–894.CrossRefGoogle Scholar
Ertekin, L.; Sorescu, A.; and Houston, M. B.. “Hands off My Brand! The Financial Consequences of Protecting Brands through Trademark Infringement Lawsuits.” Journal of Marketing, 82 (2018), 45–65.CrossRefGoogle Scholar
Fahlenbrach, R. “Founder-CEOs, Investment Decisions, and Stock Market Performance.” Journal of Financial and Quantitative Analysis, 44 (2009), 439–466.CrossRefGoogle Scholar
Fang, V. W.; Tian, X.; and Tice, S.. “Does Stock Liquidity Enhance or Impede Firm Innovation?” Journal of Finance, 69 (2014), 2085–2125.CrossRefGoogle Scholar
FASB. “Statement of Financial Accounting Standards No. 123 (Revised), Accounting for Stock-Based Compensation.” Financial Accounting Standards Board (2004).Google Scholar
Ferri, F., and Li, N.. “Does Option-Based Compensation Affect Payout Policy? Evidence from FAS 123R.” Journal of Financial and Quantitative Analysis, 55 (2020), 291–329.CrossRefGoogle Scholar
Francis, B. B.; Hasan, I.; and Sharma, Z.. “Incentives and Innovation: Evidence from CEO Compensation Contracts.” Working Paper, Rensselaer Polytechnic Institute (2011).CrossRefGoogle Scholar
Gaze, L., and Roderick, J.. “Inside the iPhone Patent Portfolio.” IP Market Report, Thomson Reuters (2012).Google Scholar
González-Pedraz, C., and Mayordomo, S.. “Trademark Activity and the Market Performance of U.S. Commercial Banks.” Journal of Business Economics and Management, 13 (2012), 931–950.CrossRefGoogle Scholar
Gopalan, R.; Milbourn, T.; Song, F.; and Thakor, A. V.. “Duration of Executive Compensation.” Journal of Finance, 69 (2014), 2777–2817.CrossRefGoogle Scholar
Gormley, T. A.; Matsa, D. A.; and Milbourn, T.. “CEO Compensation and Corporate Risk: Evidence from a Natural Experiment.” Journal of Accounting and Economics, 56 (2013), 79–101.CrossRefGoogle Scholar
Graham, S. J. H.; Hancock, G.; Marco, A. C.; and Myers, A. F.. “The USPTO Trademark Case Files Dataset: Descriptions, Lessons, and Insights.” Journal of Economics & Management Strategy, 22 (2013), 669–705.Google Scholar
Guay, W. R. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics, 53 (1999), 43–71.CrossRefGoogle Scholar
Hagendorff, J., and Vallascas, F.. “CEO Pay Incentives and Risk-Taking: Evidence from Bank Acquisitions.” Journal of Corporate Finance, 17 (2011), 1078–1095.CrossRefGoogle Scholar
Hayes, R. M.; Lemmon, M.; and Qiu, M.. “Stock Options and Managerial Incentives for Risk Taking: Evidence from FAS 123R.” Journal of Financial Economics, 105 (2012), 174–190.CrossRefGoogle Scholar
Heath, D., and Mace, C.. “The Strategic Effects of Trademark Protection.” Review of Financial Studies, 33 (2020), 1848–1877.CrossRefGoogle Scholar
Hirshleifer, D., and Suh, Y.. “Risk, Managerial Effort, and Project Choice.” Journal of Financial Intermediation, 2 (1992), 308–345.CrossRefGoogle Scholar
Hirshleifer, D., and Thakor, A. V.. “Managerial Conservatism, Project Choice, and Debt.” Review of Financial Studies, 5 (1992), 437–470.CrossRefGoogle Scholar
Hochberg, Y. V., and Lindsey, L.. “Incentives, Targeting, and Firm Performance: An Analysis of Non-Executive Stock Options.” Review of Financial Studies, 23 (2010), 4148–4186.CrossRefGoogle Scholar
Holmstrom, B., and Costa, J. R. I.. “Managerial Incentives and Capital Management.” Quarterly Journal of Economics, 101 (1986), 835–860.CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Kim, Y.; Li, H.; and Li, S.. “CEO Equity Incentives and Audit Fees.” Contemporary Accounting Research, 32 (2015), 608–638.CrossRefGoogle Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.CrossRefGoogle Scholar
Koh, P.-S., and Reeb, D. M.. “Missing R&D.” Journal of Accounting and Economics, 60 (2015), 73–94.CrossRefGoogle Scholar
Koh, P.-S.; Reeb, D. M.; Sojli, E.; Tham, W. W.; and Wang, W.. “Deleting Unreported Innovation.” Journal of Financial and Quantitative Analysis, 57 (2022), 2324–2354.CrossRefGoogle Scholar
Krasnikov, A.; Mishra, S.; and Orozco, D.. “Evaluating the Financial Impact of Branding Using Trademarks: A Framework and Empirical Evidence.” Journal of Marketing, 73 (2009), 154–166.CrossRefGoogle Scholar
Lambert, R. A.; Larcker, D. F.; and Verrecchia, R. E.. “Portfolio Considerations in Valuing Executive Compensation.” Journal of Accounting Research, 29 (1991), 129–149.CrossRefGoogle Scholar
Lee, J. M.; Kim, J.; and Bae, J.. “Founder CEOs and Innovation: Evidence from CEO Sudden Deaths in Public Firms.” Research Policy, 49 (2020), 103862.CrossRefGoogle Scholar
Lerner, J., and Wulf, J.. “Innovation and Incentives: Evidence from Corporate R&D.” Review of Economics and Statistics, 89 (2007), 634–644.CrossRefGoogle Scholar
Manso, G. “Motivating Innovation.” Journal of Finance, 66 (2011), 1823–1860.CrossRefGoogle Scholar
Mao, C. X., and Zhang, C.. “Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R.” Journal of Financial and Quantitative Analysis, 53 (2018), 867–898.CrossRefGoogle Scholar
Mukherjee, A.; Singh, M.; and Žaldokas, A.. “Do Corporate Taxes Hinder Innovation?” Journal of Financial Economics, 124 (2017), 195–221.CrossRefGoogle Scholar
Myers, A. “What Is Behind the Growth in Trademark Filings? An Analysis of United States Data.” Working Paper, United States Patent and Trademark Office (2013).CrossRefGoogle Scholar
NSF. “Business Research and Development and Innovation Survey (BRDIS): 2015.” National Science Foundation (2015). November 27, 2022 Available at https://ncses.nsf.gov/pubs/nsf18313/#&.Google Scholar
OECD. Measuring Innovation: A New Perspective - OECD. Paris, France: OECD Publishing (2010a).Google Scholar
OECD. The OECD Innovation Strategy: Getting a Head Start on Tomorrow. Paris, France: OECD Publishing (2010b).Google Scholar
OECD/Eurostat. Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition. Paris, France: OECD Publishing (2005).Google Scholar
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.CrossRefGoogle Scholar
Port, K. L. “Trademark Extortion: The End of Trademark Law.” Washington and Lee Law Review, 65 (2008), 585–635.Google Scholar
PwC. “Growth Reimagined: Prospects in Emerging Markets Drive CEO Confidence.” The 14th Annual Global CEO Survey, PricewaterhouseCoopers (2011). November 27, 2022 Available at: https://www.pwc.com/gx/en/ceo-survey/pdf/14th-annual-global-ceo-survey.pdf.Google Scholar
PwC. “Fit for the Future: Capitalising on Global Trends.” The 17th Annual Global CEO Survey, PricewaterhouseCoopers (2014). November 27, 2022 Available at https://www.pwc.com/gx/en/ceo-survey/2014/assets/pwc-17th-annual-global-ceo-survey-jan-2014.pdf.Google Scholar
Rajgopal, S., and Shevlin, T.. “Empirical Evidence on the Relation Between Stock Option Compensation and Risk Taking.” Journal of Accounting and Economics, 33 (2002), 145–171.CrossRefGoogle Scholar
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. North Holland: Elsevier (2013), 493–572.CrossRefGoogle Scholar
Simpson, G. R. “A Tax Maneuver in Delaware Puts Squeeze on Other States.” Wall Street Journal, August 9, 2002. Available at https://www.wsj.com/articles/SB1028846669582427320.Google Scholar
Skantz, T. R. “CEO Pay, Managerial Power, and SFAS 123(R).” Accounting Review, 87 (2012), 2151–2179.CrossRefGoogle Scholar
Smith, C. W., and Stulz, R. M.. “The Determinants of Firms’ Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (1985), 391–405.CrossRefGoogle Scholar
Souder, D., and Bromiley, P.. “Explaining Temporal Orientation: Evidence from the Durability of Firms’ Capital Investments.” Strategic Management Journal, 33 (2012), 550–569.CrossRefGoogle Scholar
Tian, X., and Wang, T. Y.. “Tolerance for Failure and Corporate Innovation.” Review of Financial Studies, 27 (2014), 211–255.CrossRefGoogle Scholar
USPTO. “Basic Facts About Trademarks.” United States Patent and Trademark Office (2016).Google Scholar
Wowak, A. J.; Mannor, M. J.; and Wowak, K. D.. “Throwing Caution to the Wind: The Effect of CEO Stock Option Pay on the Incidence of Product Safety Problems.” Strategic Management Journal, 36 (2015), 1082–1092.CrossRefGoogle Scholar
Xue, Y. “Make or Buy New Technology: The Role of CEO Compensation Contract in a Firm’s Route to Innovation.” Review of Accounting Studies, 12 (2007), 659–690.CrossRefGoogle Scholar
Zacks Equity Research. “General Mills Offers Yogurt for Kids.” Zacks Equity Research (2013). November 27, 2022 Available at http://finance.yahoo.com/news/general-mills-offers-yogurt-kids-143850885.html.Google Scholar
Supplementary material: File

Faurel et al. supplementary material

Faurel et al. supplementary material
Download Faurel et al. supplementary material(File)
File 661.4 KB