Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-04T21:05:42.367Z Has data issue: false hasContentIssue false
  • English
  • Français

Director Job Security and Corporate Innovation

Published online by Cambridge University Press:  16 January 2023

Po-Hsuan Hsu ,
Yiqing Lü ,
Hong Wu  and
Yuhai Xuan Open the ORCID record for Yuhai Xuan [Opens in a new window]
Po-Hsuan Hsu
Affiliation:
National Tsing Hua University, College of Technology Management [email protected]
Yiqing Lü
Affiliation:
New York University Shanghai [email protected]
Hong Wu
Affiliation:
Fudan University, School of Economics [email protected]
Yuhai Xuan*
Affiliation:
University of California, Irvine
*
[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.

In this article, we show that firms can become conservative in innovation when their directors face job insecurity. We find that after the staggered enactment of majority voting legislation that strengthens shareholders’ power in director elections, firms produce fewer patents, particularly exploratory patents, and fewer forward citations. This effect is stronger for directors facing higher dismissal costs or threats and for firms with greater needs for board expertise and is mitigated by institutional investors’ expertise in innovation. Overall, our results suggest that heightened job insecurity induces director myopia, which leads to a reduction in investment in risky, long-term innovation projects.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 652 - 689
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 (https://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), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for helpful comments from an anonymous referee, Konan Chan, Ching-Hung Chang, San-Lin Chung, Claudia Custodio, David Denis, Miguel Ferreira, Jarrad Harford (the editor), Andrew Koch, Leming Lin, Tingting Liu, Frederik Schlingemann, Chun-Hua Shen, Shawn Thomas, Cong Wang, Yanzhi Wang, and Fei Xie, as well as conference and seminar participants at the University of Pittsburgh, National Chengchi University, National Taiwan University, Fudan University, the 2018 Conference on the Theories and Practices of Securities and Financial Markets, and the 2018 China International Conference in Finance. We thank Kevin Tseng for his research assistance. P.-H.H. acknowledges the Ministry of Education and the Ministry of Science and Technology in Taiwan for financial support (Project Nos. MOE110J0321Q2 and MOST109-2628-H-007-001-MY4), and H.W. acknowledges the National Natural Science Foundation of China (Project No. NSFC-71803027) for financial support.

References

Acharya, V. V.; Baghai, R. P.; and Subramanian, K. V.. “Wrongful Discharge Laws and Innovation.” Review of Financial Studies, 27 (2014), 301–346.CrossRefGoogle Scholar
Adams, R. B. “What Do Boards Do? Evidence from Board Committee and Director Compensation Data.” Working Paper, University of Queensland (2003).CrossRefGoogle Scholar
Adams, R. B., and Ferreira, D.. “A Theory of Friendly Boards.” Journal of Finance, 62 (2007), 217–250.CrossRefGoogle Scholar
Adams, R. B.; Hermalin, B. E.; and Weisbach, M. S.. “The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey.” Journal of Economic Literature, 48 (2010), 58–107.CrossRefGoogle Scholar
Aggarwal, R.; Dahiya, S.; and Prabhala, N. R.. “The Power of Shareholder Votes: Evidence from Uncontested Director Elections.” Journal of Financial Economics, 133 (2019), 134–153.CrossRefGoogle Scholar
Aghion, P.; Van Reenen, J.; and Zingales, L.. “Innovation and Institutional Ownership.” American Economic Review, 103 (2013), 277–304.CrossRefGoogle Scholar
Almeida, H.; Kim, C.-S.; and Kim, H. B.. “Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis.” Journal of Finance, 70 (2015), 2539–2586.CrossRefGoogle Scholar
An, H.; Chen, C. R.; Wu, Q.; and Zhang, T.. “Corporate Innovation: Do Diverse Boards Help?” Journal of Financial and Quantitative Analysis, 56 (2020), 155–182.CrossRefGoogle Scholar
Atanassov, J. “Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting.” Journal of Finance, 68 (2013), 1097–1131.CrossRefGoogle Scholar
Balsmeier, B.; Fleming, L.; and Manso, G.. “Independent Boards and Innovation.” Journal of Financial Economics, 123 (2017), 536–557.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
Bebchuk, L. A. “The Myth of the Shareholder Franchise.” Virginia Law Review, 93 (2007), 675–732.Google Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” The Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Benner, M. J., and Tushman, M.. “Process Management and Technological Innovation: A Longitudinal Study of the Photography and Paint Industries.” Administrative Science Quarterly, 47 (2002), 676–706.CrossRefGoogle Scholar
Bereskin, F. L.; Hsu, P.-H.; and Rotenberg, W.. “The Real Effects of Real Earnings Management: Evidence from Innovation.” Contemporary Accounting Research, 35 (2018), 525–557.CrossRefGoogle Scholar
Bernstein, S. “Does Going Public Affect Innovation?” The Journal of Finance, 70 (2015), 1365–1403.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
Bhojraj, S.; Hribar, P.; Picconi, M.; and McInnis, J.. “Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts.” Journal of Finance, 64 (2009), 2361–2388.CrossRefGoogle Scholar
Biggerstaff, L.; Cicero, D. C.; and Puckett, A.. “FORE! An Analysis of CEO Shirking.” Management Science, 63 (2017), 2302–2322.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; Ma, S.; and Tian, X.. “How Does Hedge Fund Activism Reshape Corporate Innovation?” Journal of Financial Economics, 130 (2018), 237–264.CrossRefGoogle Scholar
Brown, L. D., and Marcus, L. C.. “A Temporal Analysis of Quarterly Earnings Thresholds: Propensities and Valuation Consequences.” Accounting Review, 80 (2005), 423–440.CrossRefGoogle Scholar
Brown, L. D., and Spina, P. A.. “To What Extent Does the Financial Reporting Process Curb Earnings Surprise Games?” Journal of Accounting Research, 45 (2007), 947–981.CrossRefGoogle Scholar
Bushee, B. J. “The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Cai, J. I. E.; Garner, J. L.; and Walkling, R. A.. “Electing Directors.” Journal of Finance, 64 (2009), 2389–2421.CrossRefGoogle Scholar
Cai, J.; Garner, J. L.; and Walkling, R. A.. “A Paper Tiger? An Empirical Analysis of Majority Voting.” Journal of Corporate Finance, 21 (2013), 119–135.CrossRefGoogle Scholar
Chang, C.-H., and Wu, Q.. “Board Networks and Corporate Innovation.” Management Science, 67 (2021), 3618–3654.CrossRefGoogle Scholar
Chemmanur, T. J., and Tian, X.. “Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis.” Journal of Financial and Quantitative Analysis, 53 (2018), 1163–1194.CrossRefGoogle Scholar
Cuñat, V.; Lü, Y.; and Wu, H.. “Managerial Response to Shareholder Empowerment: Evidence from MV Legislations.” Working Paper, European Corporate Governance Institute (2019).CrossRefGoogle Scholar
Deschamps, J.-P., and Nelson, B.. Innovation Governance: How Top Management Organizes and Mobilizes for Innovation. West Sussex, UK: John Wiley & Sons (2014).Google Scholar
Ederer, F., and Manso, G.. “Is Pay for Performance Detrimental to Innovation?” Management Science, 59 (2013), 1496–1513.CrossRefGoogle Scholar
Ederer, F., and Manso, G.. “Incentives for Innovation: Bankruptcy, Corporate Governance, and Compensation Systems.” In Handbook on Law, Innovation, and Growth, Litan, R. E., ed. Cheltenham, UK: Edward Elgar Publishing (2011), 90–111.Google Scholar
Ertimur, Y.; Ferri, F.; and Oesch, D.. “Does the Director Election System Matter? Evidence from Majority Voting.” Review of Accounting Studies, 20 (2015), 1–41.CrossRefGoogle Scholar
Faleye, O. “Classified Boards, Firm Value, and Managerial Entrenchment.” Journal of Financial Economics, 83 (2007), 501–529.CrossRefGoogle Scholar
Faleye, O.; Hoitash, R.; and Hoitash, U.. “The Costs of Intense Board Monitoring.” Journal of Financial Economics, 101 (2011), 160–181.CrossRefGoogle Scholar
Fischer, P. E.; Gramlich, J. D.; Miller, B. P.; and White, H. D.. “Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections.” Journal of Accounting and Economics, 48 (2009), 172–189.CrossRefGoogle Scholar
Fresard, L. “Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings.” Journal of Finance, 65 (2010), 1097–1122.CrossRefGoogle Scholar
Gao, H.; Harford, J.; and Li, K.. “CEO Pay Cuts and Forced Turnover: Their Causes and Consequences.” Journal of Corporate Finance, 18 (2012), 291–310.CrossRefGoogle Scholar
Gao, H.; Hsu, P.-H.; and Li, K.. “Innovation Strategy of Private Firms.” Journal of Financial and Quantitative Analysis, 53 (2018), 1–32.CrossRefGoogle Scholar
Georgeson. “2005–2010 Annual Corporate Governance Reviews” (2010), available at http://www.georgeson.com (accessed on Mar. 3, 2013).Google Scholar
Graham, J. R.; Harvey, C. R.; and Rajgopal, S.. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics, 40 (2005), 3–73.CrossRefGoogle Scholar
Griffin, D.; Li, K.; and Xu, T.. “Board Gender Diversity and Corporate Innovation: International Evidence.” Journal of Financial and Quantitative Analysis, 56 (2020), 123–154.CrossRefGoogle Scholar
Griliches, Z. “Market Value, R&D, and Patents.” Economics Letters, 7 (1981), 183–187.CrossRefGoogle Scholar
Griliches, Z. “Patent Statistics as Economic Indicators: A Survey.” Journal of Economic Literature, 28 (1990), 1661–1707.Google Scholar
Hall, B. H.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 36 (2005a), 16–38.Google Scholar
Hall, B. H.; Jaffe, A. B.; and Trajtenberg, M.. “The NBER Patent Citation Data File: Lessons, Insights and Methodological Tools.” In Patents, Citations and Innovations: A Window on the Knowledge Economy, Jaffe, A. B. and Trajtenberg, M., eds. Cambridge, MA: MIT Press (2005b), 403–470.Google Scholar
Harford, J. “Takeover Bids and Target Directors’ Incentives: The Impact of a Bid on Directors’ Wealth and Board Seats.” Journal of Financial Economics, 69 (2003), 51–83.CrossRefGoogle Scholar
Harford, J., and Schonlau, R. J.. “Does the Director Labor Market Offer Ex Post Settling-Up for CEOs? The Case of Acquisitions.” Journal of Financial Economics, 110 (2013), 18–36.CrossRefGoogle Scholar
Harhoff, D.; Narin, F.; Scherer, F. M.; and Vopel, K.. “Citation Frequency and the Value of Patented Inventions.” Review of Economics and Statistics, 81 (1999), 511–515.CrossRefGoogle Scholar
He, J., and Tian, X.. “The Dark Side of Analyst Coverage: The Case of Innovation.” Journal of Financial Economics, 109 (2013), 856–878.CrossRefGoogle Scholar
He, J., and Tian, X.. “Finance and Corporate Innovation: A Survey.” Asia-Pacific Journal of Financial Studies, 47 (2018), 165–212.CrossRefGoogle Scholar
He, J., and Tian, X.. “Institutions and Innovation.” Annual Review of Financial Economics, 12 (2020), 377–398.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature (No. w8161). Cambridge, MA: NBER (2001).CrossRefGoogle Scholar
Hill, L. A., and Davis, G.. “The Board’s New Innovation Imperative.” Harvard Business Review, 95 (2017), 102–109.Google Scholar
Hirshleifer, D.; Hsu, P.-H.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632–654.CrossRefGoogle Scholar
Hirshleifer, D.; Hsu, P.-H.; and Li, D.. “Innovative Originality, Profitability, and Stock Returns.” Review of Financial Studies, 31 (2018), 2553–2605.CrossRefGoogle Scholar
Hsieh, P.-F.; Hsu, P.-H.; and Liu, C.-H.. “Regulatory Changes to Option Compensation, Employee Effort, and Brand Capital.” Working Paper (2022), National Tsing Hua University (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3663232, accessed on Sept. 27, 2022).CrossRefGoogle Scholar
Iliev, P.; Lins, K. V.; Miller, D. P.; and Roth, L.. “Shareholder Voting and Corporate Governance Around the World.” Review of Financial Studies, 28 (2015), 2167–2202.CrossRefGoogle Scholar
Imbens, G. W., and Wooldridge, J. M.. “Recent Developments in the Econometrics of Program Evaluation.” Journal of Economic Literature, 47 (2009), 5–86.CrossRefGoogle Scholar
Jaffe, A. B.; Trajtenberg, M.; and Henderson, R.. “Geographic Localization of Knowledge Spillovers as Evidenced by Patent Citations.” Quarterly Journal of Economics, 108 (1993), 577–598.CrossRefGoogle Scholar
Jenter, D., and Kanaan, F.. “CEO Turnover and Relative Performance Evaluation.” Journal of Finance, 70 (2015), 2155–2184.CrossRefGoogle Scholar
Jenter, D., and Lewellen, K.. “Performance-Induced CEO Turnover.” Review of Financial Studies, 34 (2021), 569–617.CrossRefGoogle Scholar
Kamien, M. I., and Schwartz, N. L.. “Market Structure and Innovation: A Survey.” Journal of Economic Literature, 13 (1975), 1–37.Google Scholar
Kaplan, S. N., and Minton, B. A.. “How Has CEO Turnover Changed?” International Review of Finance, 12 (2012), 57–87.CrossRefGoogle Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R. W.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.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
Lazear, E. P. “Job Security Provisions and Employment.” Quarterly Journal of Economics, 105 (1990), 699–726.CrossRefGoogle Scholar
Lerner, J. “The Importance of Patent Scope: An Empirical Analysis.” RAND Journal of Economics, 25 (1994), 319–333.CrossRefGoogle Scholar
Lerner, J.; Sorensen, M.; and Strömberg, P. E. R.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445–477.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
Levinthal, D. A., and March, J. G.. “The Myopia of Learning.” Strategic Management Journal, 14 (1993), 95–112.CrossRefGoogle Scholar
Manso, G. “Motivating Innovation.” Journal of Finance, 66 (2011), 1823–1860.CrossRefGoogle Scholar
McGrath, R. G. “Exploratory Learning, Innovative Capacity and Managerial Oversight.” Academy of Management Journal, 44 (2001), 118–131.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Alternative Mechanisms for Corporate Control.” American Economic Review, 79 (1989), 842–852.Google Scholar
Morck, R.; Wolfenzon, D.; and Yeung, B.. “Corporate Governance, Economic Entrenchment, and Growth.” Journal of Economic Literature, 43 (2005), 655–720.CrossRefGoogle Scholar
Naveen, L.; Daniel, N.; and McConnell, J.. “The Advisory Role of Foreign Directors in US Firms.” Working Paper (2013), Temple University (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023420, accessed on June 18, 2020).Google Scholar
Sapra, H.; Subramanian, A.; and Subramanian, K. V.. “Corporate Governance and Innovation: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 49 (2014), 957–1003.CrossRefGoogle Scholar
Seru, A. “Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity.” Journal of Financial Economics, 111 (2014), 381–405.CrossRefGoogle Scholar
Stein, J. C. “Takeover Threats and Managerial Myopia.” Journal of Political Economy, 96 (1988), 61–80.CrossRefGoogle Scholar
Stein, J. C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655–669.CrossRefGoogle Scholar
Westphal, J. D. “Collaboration in the Boardroom: Behavioral and Performance Consequences of CEO-Board Social Ties.” Academy of Management Journal, 42 (1999), 7–24.CrossRefGoogle Scholar
Yermack, D. “Remuneration, Retention, and Reputation Incentives for Outside Directors.” Journal of Finance, 59 (2004), 2281–2308.CrossRefGoogle Scholar
Zhao, H. “Executive Labor Market Segmentation: How Local Market Density Affects Incentives and Performance.” Journal of Corporate Finance, 50 (2018), 1–21.CrossRefGoogle Scholar
Supplementary material: PDF

Hsu et al. supplementary material

Hsu et al. supplementary material

Download Hsu et al. supplementary material(PDF)
PDF 223.2 KB