Motivating Innovation in Newly Public Firms

Abstract

Prior research suggests that executive option grants that do not quickly vest provide managers with better incentives to pursue long-term, rather than short-term, objectives. Previous research also suggests that the pursuit of long-term objectives may be undermined by the risk of early termination. We conjecture that these arguments jointly suggest that managers are better motivated to pursue innovation when they are given more incentive compensation with longer vesting periods for unexercised options and yet some protection from disruptive takeover threats. Our evidence for a sample of newly public firms is consistent with more innovative firms jointly choosing such a combination.

Keywords: innovation, corporate governance, incentive contracts

JEL Classification: G34, L20