Social connections and innovation in diversified conglomerates

Tomas Jandik and Tatiana Salikhova

Journal of Financial Research, 2024, vol. 47, issue 4, 1135-1163

Abstract: We study the effect of social connections between divisional managers and CEO on the scale and success of innovation activities in US diversified conglomerates. Divisional managers who previously worked or studied with the CEO file a greater number of patents during their tenure at the segment. These patents receive more citations in the future and represent a greater scientific and economic value. To provide causal support for our findings, we exploit plausibly exogenous variation in connections caused by CEO nonperformance‐related retirements. The difference‐in‐differences estimation shows that after the CEO leaves the office, connected segments experience a drop in the quantity and quality of innovation activities. The effect of connections to the CEO on innovation outcomes is stronger in firms with high internal information asymmetry. These findings can imply that social connections help to mitigate adverse selection problems associated with risky R&D investments.

Date: 2024
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https://doi.org/10.1111/jfir.12395

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