Governing Innovation: Director Job Security and Innovation Project Choices

Abstract

In this paper, we examine the influence of directors’ job security on firms’ risk-taking and innovations. Using the staggered enactment of majority voting legislation across different U.S. states as an exogenous threat to directors’ job security, we find an affected firm produces fewer patents, especially exploratory patents, and fewer forward citations after legislative changes. This effect is stronger when directors have fewer outside options and longer career and employment horizons, or when a firm is more actively traded by transient investors. Moreover, firms file fewer patents in and make fewer citations to fields related to directors’ prior working experiences after legislative changes, suggesting that directors who face greater job insecurity compromise their roles in advising firms engaged in risky innovation.

Keywords: director reelection, job security, corporate governance, innovation, exploration and exploitation

JEL Classification: G34, L14, L25, M21