CEO Contract Horizon and Innovation

Abstract

We study the relation between innovation quality and managerial time horizon, measured by the time remaining until the end of fixed-term CEO employment contracts. Firms with longer CEO horizons produce more important innovation on average: one additional year in horizon is associated with 8% more patent citations. Long-horizon CEOs also increase R&D, design more exploratory innovation strategies, hire more inventors, and set longer-term incentives for researchers. We provide suggestive evidence that CEO contracts affect innovation decisions, using exogenous restrictions to contract length resulting from a governance reform. Our results support the view that long-term managerial capital is important for innovation.

Keywords: career concerns, CEO contracts, innovation, investment, myopia

JEL Classification: G31, G34, J41, J63, O31