Radical or Incremental Innovations – R&D Investment Around CEO Retirement

Posted: 11 May 2014 Last revised: 2 Oct 2017

See all articles by Crystal Xu

Crystal Xu

Manhattan College

Meng Yan

Fordham University - Gabelli School of Business

Date Written: May 1, 2014

Abstract

We study the impact retirement has on how CEOs spend R&D funds. Consistent with retiring CEOs’ short horizons and growing conservatism, we find evidence that CEOs tend to prefer incremental innovations as they approach retirement. Using patent data to measure firms’ innovation outputs, we find that firms receive fewer patent grants for applications filed toward the end of CEO tenures, and these patent grants receive fewer subsequent citations. Moreover, we find that large amounts of vested, in-the-money option holdings exacerbate retiring CEOs’ preference for incremental innovations, and founder CEOs pursue incremental innovations to a greater extent than non-founder CEOs close to retirement. However, a normal “relay process” of managerial succession and higher stock ownership by independent directors mitigate retiring CEOs’ preference for incremental innovations. We find no evidence that the documented incremental innovations before retirement are driven by either poor firm performance or a general shift from innovation to stability as CEO tenures increase or as CEOs age. Overall, the study identifies a new type of myopic behavior related to CEO retirement and highlights the importance of looking beyond R&D spending in future studies on the managerial investment myopia.

Keywords: CEO Retirement, Innovations, Patents and Citations, CEO Compensation

JEL Classification: O32, M12, M51

Suggested Citation

Xu, Crystal and Yan, Meng, Radical or Incremental Innovations – R&D Investment Around CEO Retirement (May 1, 2014). Journal of Accounting, Auditing and Finance, 29(4), 2014; Fordham University Schools of Business Research Paper No. 2435293. Available at SSRN: https://ssrn.com/abstract=2435293

Crystal Xu (Contact Author)

Manhattan College ( email )

Manhattan College Parkway
Riverdale, NY 10471
United States

Meng Yan

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

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