Unintended Consequences of Compensation Peer Groups on Corporate Innovation

76 Pages Posted: 16 Mar 2021 Last revised: 25 Oct 2022

See all articles by Yuan-Teng Hsu

Yuan-Teng Hsu

Shanghai Business School

Chia-Wei Huang

National Chengchi University

Kees Koedijk

TIAS School of Business and Society, Tilburg University

Date Written: October 26, 2022

Abstract

Selection of compensation peers not only aims to determine CEO compensation but also to create the unintended peer effects on corporate innovation, because they are likely to share similar product market and CEO characteristics and compensation schemes as the firm. After controlling for industry and geography peer groups, the findings confirmed the average innovation activity of compensation peers to be a significant and distinct predictor of corporate innovation. Further analysis showed that (1) the peer effect is stronger in firms and compensation peers that pay their CEOs with long-term compensation, in firms that have stronger labor market competition and board monitoring, and in peer companies that experience higher innovation competition and are closer to the median peer company in the peer group; (2) the obtained results are likely not attributable to the knowledge spillover mechanism and are more consistent with the peer pressure mechanism, and (3) the SEC’s 2006 executive compensation disclosure rules may have generated peer effects.

Keywords: Peer Effect; R&D Expenditure; Patent; Compensation Peer Group

JEL Classification: G30; J33; O31; O32.

Suggested Citation

Hsu, Yuan-Teng and Huang, Chia-Wei and Koedijk, Kees, Unintended Consequences of Compensation Peer Groups on Corporate Innovation (October 26, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3775453 or http://dx.doi.org/10.2139/ssrn.3775453

Yuan-Teng Hsu

Shanghai Business School ( email )

Shanghai
China

Chia-Wei Huang (Contact Author)

National Chengchi University ( email )

64, Section 2, ZhiNan Rd.
64, Section 2, ZhiNan Rd.
Taipei City, Wenshan District 116
Taiwan

Kees Koedijk

TIAS School of Business and Society, Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

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