Should Directors Have Term Limits? – Evidence from Corporate Innovation

Abstract

We examine the effect of directors with extended tenure on corporate innovation. Using a sample of U.S. firms from 2001-2006, we find that firms with a higher portion of directors with extended tenure are associated with significantly lower innovation productivity and quality, as manifested in a lower number of patents and citations. The effect is more pronounced for firms operating in highly competitive environments, for firms pursuing an exploratory innovation strategy. In contrast, the effect is attenuated for firms with low board activism. Using a difference-in-differences approach, we find that a reduction in the proportion of directors with extended tenure due to director death results in significant improvement in innovation performance. Finally, boards with extended tenure attenuate the contribution of innovation outputs to future firm value and performance. Our study sheds new light on the debate of board tenure and provides another justification for imposing term limits on directors.

Keywords: Board of directors; tenure; innovation; patents; citations; exploration;

JEL Classification: G34; O31; O34