Incentivizing Managers to Build Innovative Firms
24 Pages Posted: 30 Sep 2010
Date Written: July 1, 2010
We investigate whether the equity-linked components of top executive pay have an effect on patenting activity within a firm. We find a positive relationship between firm patenting activity and managerial alignment incentives created by stock and stock option grants. Prior work has shown that the market value of a firm reflects the value of its patents. Thus, our finding suggests innovation is one such channel through which equity alignment incentives positively impact firm value. On the other hand, we find that the risk-taking incentive from stock options does not increase patenting.
Keywords: Patents, Executive Compensation, Pay-for-Performance Sensitivity
JEL Classification: G32, G30, L2, O3
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