Unintended consequences of compensation peer groups on corporate innovation

Yuan-Teng Hsu, Chia-Wei Huang and Kees G. Koedijk

Journal of Corporate Finance, 2023, vol. 78, issue C

Abstract: When companies select and use compensation peers to determine chief executive officer (CEO) compensation, they create unintended peer effects on corporate innovation due to the similarities between these companies and their compensation peers in terms of product markets, CEO characteristics, and compensation schemes. After controlling for industry and geography peer groups, the findings confirm that the average innovation activity of compensation peers is 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 using long-term compensation, in firms with 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 Securities and Exchange Commission's 2006 executive compensation disclosure rules may have generated peer effects.

Keywords: Peer effect; R&D expenditure; Patent; Compensation peer group (search for similar items in EconPapers)
JEL-codes: G30 J33 O31 O32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:78:y:2023:i:c:s092911992200164x

DOI: 10.1016/j.jcorpfin.2022.102321

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