Managerial Conservatism, Board Independence, and Corporate Innovation

44 Pages Posted: 10 Feb 2017 Last revised: 24 Apr 2018

See all articles by Jun Lu

Jun Lu

Central University of Finance and Economics (CUFE)

Wei Wang

Cleveland State University

Date Written: September 1, 2017

Abstract

Using panel data on U.S. public firms, we document a positive effect of board independence on corporate innovation. This effect is concentrated in firms that are larger in size, in the non-technical industries, facing less product market competition, and using more debt, where managers are more likely to be excessively risk averse. We establish causality of board independence on innovation using a difference-in-difference approach that exploits an exogenous shock to board composition, namely, the mandate of a majority of outside directors on company boards by NYSE and NASDAQ in response to the passage of Sarbanes-Oxley Act in 2002. We further examine incentive compensation as a possible mechanism. We show that firms with more independent boards use more equity-based compensation, especially stock options, to promote managerial risk-taking.

Keywords: Innovation, Board Independence, Outside Director, Endogeneity, Difference-In-Difference, SOX

JEL Classification: G34, G38, O31

Suggested Citation

Lu, Jun and Wang, Wei, Managerial Conservatism, Board Independence, and Corporate Innovation (September 1, 2017). Journal of Corporate Finance, Vol. 48, 2018. Available at SSRN: https://ssrn.com/abstract=2914132 or http://dx.doi.org/10.2139/ssrn.2914132

Jun Lu (Contact Author)

Central University of Finance and Economics (CUFE) ( email )

Beijing, Beijing
China

Wei Wang

Cleveland State University ( email )

Cleveland, OH 44115
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
197
Abstract Views
949
rank
162,820
PlumX Metrics