CEO dominance and firm innovation effort

Abstract

Purpose: The purpose of this paper is to investigate whether innovation effort is lower for firms exhibiting signs of higher chief executive officer (CEO) dominance and whether such CEOs can be incentivized to pursue risky ventures such as innovation projects in line with shareholder's interests that are geared toward the long-term growth of the firm. Design/methodology/approach: The paper utilizes panel data of US publicly listed companies (2007–2016) to address the influence of CEO dominance on firm innovation effort and the moderating effects of incentives in this relationship through ordinary least squares (OLS) estimations. A two-stage least squares (2SLS) technique is also employed to address possible endogeneity. As a robustness check, further analysis is conducted utilizing an alternative proxy for CEO incentive as well as Tobit analysis (with panel-level random effects). Findings: Results from both OLS and Tobit estimations offer two key findings. First, there is a significantly negative relationship between CEO pay slice and firm research and development (R&D) intensity. Second, the interaction effect of CEO incentives and CEO dominance is significant and positive. Research limitations/implications: When provided with the right incentives, such as those that reward long-term performance, dominant CEOs can be incentivized to go after risky ventures like innovation projects that are crucial to promoting the long-term growth of the firm. Originality/value: This paper utilizes R&D instead of patent outputs as proxies for innovation where the former enables studying R&D efforts for more recent periods compared to prior studies that utilize patent data.