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Does CEO inside debt promote corporate innovation?

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  • Lee, Gemma

Abstract

Given the nature of innovation, optimal incentive schemes to motivate innovation should exhibit substantial tolerance for failure in the short-term and reward for success in the long-term. Inside debt such as pension and deferred compensation is a long-term commitment contract and largely independent of CEOs’ short-term performance, making them more willing to engage in long-term innovation activities. This study examines the role of inside debt in a CEO's compensation package and shows that inside debt is positively associated with innovation. However, I also find that a high balance of inside debt compared to equity incentives, such as stock and stock option holdings adversely affects the CEO's incentives to innovate, implying important cross-sectional differences in a firm's optimal inside debt policies for innovation. The results are consistent after controlling for firm and manager fixed effects and reverse causality problems.

Suggested Citation

  • Lee, Gemma, 2020. "Does CEO inside debt promote corporate innovation?," Finance Research Letters, Elsevier, vol. 37(C).
    • Handle: RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319309365
    DOI: 10.1016/j.frl.2019.101362
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Inside debt; Innovation; Patent; Executive compensation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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