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Threat of termination and firm innovation

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  • Shahbaz Sheikh

    (The University of Western Ontario)

Abstract

This study investigates how the ex-ante threat of termination affects firm performance in innovation measured by number of patents and citations. Empirical results show that the threat of termination is negatively associated with both measures of firm innovation. This relation however is sensitive to industry structure. The negative effect of the threat of termination on innovation is statistically significant only for high-tech firms. For low-tech firms there is no statistically significant relation between the threat of termination and firm innovation. One plausible explanation is that high-tech firms are inherently risky and have higher rates of project failure. Adding the risk of higher threat of termination makes the manager more risk averse and forces her to avoid investing in value increasing innovations. Managers in low-tech firms don’t face such pressures. The policy implication is that high-tech firms should lower threat of termination and increase tolerance for project failure to encourage innovation.

Suggested Citation

  • Shahbaz Sheikh, 2017. "Threat of termination and firm innovation," Annals of Finance, Springer, vol. 13(1), pages 75-95, February.
    • Handle: RePEc:kap:annfin:v:13:y:2017:i:1:d:10.1007_s10436-016-0290-8
    DOI: 10.1007/s10436-016-0290-8
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    References listed on IDEAS

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    Cited by:

    1. Adriana Gama & Isabelle Maret & Virginie Masson, 2019. "Endogenous heterogeneity in duopoly with deterministic one-way spillovers," Annals of Finance, Springer, vol. 15(1), pages 103-123, March.

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    More about this item

    Keywords

    Termination; Incentives; Risk taking; Patents; Citations; Innovation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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