Board's IT Expertise and Firm Innovation

Abstract

We examine the relationship between the board’s IT expertise and firm innovation. Using a novel hand–collected dataset from biographies of directors, we find that the board’s IT expertise has a positive influence on firm innovation – measured in terms of R&D expenditures and patents applied. The board’s IT expertise is one dimension among various existing governance mechanisms in a firm that can influence innovation. Studying the conditions under which the board’s IT expertise matters, we analyze the cross–sectional variation in a firm’s existing governance mechanisms with regards to innovation. Building on prior research, we identify three mechanisms that are associated with innovation – institutional ownership, classified board, and CEO/Chair duality. We find that the board’s IT expertise can substitute for these governance mechanisms in driving innovation. The board’s IT expertise, we find, also has a positive impact on innovation quality, as measured by patent related citations. We also find that the board’s IT expertise can reduce information asymmetries even in relatively complex firms and can spur innovation. We further present evidence that the type of IT directors on the board matters. In particular, innovation outcomes are primarily driven by outside/independent IT directors. Finally, we exploit industry level data breaches as an exogenous shock for the appointment of IT directors on board, and argue that our results are not driven by endogeneity.

Keywords: Board of directors, IT governance, corporate governance mechanisms, firm innovation

JEL Classification: G3, M15, M4, O31