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Director Job Security and Corporate Innovation

Published online by Cambridge University Press:  16 January 2023

Po-Hsuan Hsu ,
Yiqing Lü ,
Hong Wu  and
Yuhai Xuan Open the ORCID record for Yuhai Xuan [Opens in a new window]
Po-Hsuan Hsu
Affiliation:
National Tsing Hua University, College of Technology Management pohsuanhsu@mx.nthu.edu.tw
Yiqing Lü
Affiliation:
New York University Shanghai yiqing.lu@nyu.edu
Hong Wu
Affiliation:
Fudan University, School of Economics hongwu@fudan.edu.cn
Yuhai Xuan*
Affiliation:
University of California, Irvine
*
yuhai.xuan@uci.edu (corresponding author)
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Abstract

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In this article, 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 2 , March 2024 , pp. 652 - 689
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful for helpful comments from an anonymous referee, Konan Chan, Ching-Hung Chang, San-Lin Chung, Claudia Custodio, David Denis, Miguel Ferreira, Jarrad Harford (the editor), Andrew Koch, Leming Lin, Tingting Liu, Frederik Schlingemann, Chun-Hua Shen, Shawn Thomas, Cong Wang, Yanzhi Wang, and Fei Xie, as well as conference and seminar participants at the University of Pittsburgh, National Chengchi University, National Taiwan University, Fudan University, the 2018 Conference on the Theories and Practices of Securities and Financial Markets, and the 2018 China International Conference in Finance. We thank Kevin Tseng for his research assistance. P.-H.H. acknowledges the Ministry of Education and the Ministry of Science and Technology in Taiwan for financial support (Project Nos. MOE110J0321Q2 and MOST109-2628-H-007-001-MY4), and H.W. acknowledges the National Natural Science Foundation of China (Project No. NSFC-71803027) for financial support.

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