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Managerial conservatism, board independence and corporate innovation

Jun Lu and Wei Wang

Journal of Corporate Finance, 2018, vol. 48, issue C, 1-16

Abstract: Using panel data on U.S. public firms, we document a positive effect of board independence on corporate innovation. This effect is concentrated in firms that are larger in size, in the non-technical industries, facing less product market competition, and using more debt, where managers are more likely to be excessively risk averse. We establish causality of board independence on innovation using a difference-in-difference approach that exploits an exogenous shock to board composition, namely, the mandate of a majority of outside directors on company boards by NYSE and NASDAQ in response to the passage of Sarbanes-Oxley Act in 2002. We further examine incentive compensation as a possible mechanism. We show that firms with more independent boards use more equity-based compensation, especially stock options, to promote managerial risk-taking.

Keywords: Innovation; Board independence; Outside director; Endogeneity; Difference-in-difference; SOX (search for similar items in EconPapers)
JEL-codes: G34 G38 O31 (search for similar items in EconPapers)
Date: 2018
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