CEO Incentives and New Product Development: Insights from Trademarks
61 Pages Posted: 28 Mar 2015 Last revised: 24 Sep 2017
Date Written: September 22, 2017
New product development is critical for firms to achieve and maintain growth and performance, and is part of the OECD’s definition of innovation. We build a novel dataset of 123,545 USPTO trademark registrations by S&P 1500 firms from 1993 to 2011 to study whether and how CEO compensation risk incentives motivate new product development. Our tests offer evidence on how risk incentives affect the development of new products. We find that the number of trademarks increases with the fraction of compensation in the form of stock options, the convexity of incentives, and unvested stock options, both in low-patent (non-high-tech) and high-patent (high-tech) industries. Using a revised accounting rule, SFAS 123(R), as an exogenous shock, we find that reductions in stock option compensation cause reductions in trademark creation. Overall, the evidence indicates that CEO risk-taking incentives are important drivers of new product development.
Keywords: Product Development, Trademarks, Stock Options, Vega, Incentives, Compensation, Innovation
JEL Classification: J33, M12, M41, M52, O31
Suggested Citation: Suggested Citation