CEO Contract Horizon and Innovation

Gonzalez-Uribe, Juanita; Groen-Xu, Moqi

doi:10.2139/ssrn.2633763

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CEO Contract Horizon and Innovation

61 Pages Posted: 22 Jul 2015 Last revised: 18 Jul 2017

See all articles by Juanita Gonzalez-Uribe

Juanita Gonzalez-Uribe

London School of Economics & Political Science (LSE) - Department of Finance

Moqi Groen-Xu

Queen Mary University of London

Date Written: July 17, 2017

Abstract

We study the relation between innovation quality and managerial time horizon, measured by the time remaining until the end of fixed-term CEO employment contracts. Firms with longer CEO horizons produce more important innovation on average: one additional year in horizon is associated with 8% more patent citations. Long-horizon CEOs also increase R&D, design more exploratory innovation strategies, hire more inventors, and set longer-term incentives for researchers. We provide suggestive evidence that CEO contracts affect innovation decisions, using exogenous restrictions to contract length resulting from a governance reform. Our results support the view that long-term managerial capital is important for innovation.

Keywords: career concerns, CEO contracts, innovation, investment, myopia

JEL Classification: G31, G34, J41, J63, O31

Suggested Citation: Suggested Citation

Gonzalez-Uribe, Juanita and Groen-Xu, Moqi, CEO Contract Horizon and Innovation (July 17, 2017). Available at SSRN: https://ssrn.com/abstract=2633763 or http://dx.doi.org/10.2139/ssrn.2633763