Director Job Security and Corporate Innovation

In this paper, we show that firms can become conservative in innovation when their directors face job insecurity. We find that after the staggered enactment of majority voting legislation that strengthens shareholders' power in director elections, firms produce fewer patents, particularly exploratory patents, and fewer forward citations. This effect is stronger for directors facing higher dismissal costs or threats and for firms with greater needs for board expertise and is mitigated by institutional investors' expertise in innovation. Overall, our results suggest that heightened job insecurity induces director myopia, which leads to a reduction in investment in risky, long-term innovation projects.

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

JEL Classification: G34, L14, L25, M21

Suggested Citation: Suggested Citation

Hsu, Po-Hsuan and Lü, Yiqing and Wu, Hong and Xuan, Yuhai, Director Job Security and Corporate Innovation (July 1, 2022). Available at SSRN: https://ssrn.com/abstract=3520524 or http://dx.doi.org/10.2139/ssrn.3520524