Does CEO inside debt promote corporate innovation?

Gemma Lee

Finance Research Letters, 2020, vol. 37, issue C

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.

Keywords: Inside debt; Innovation; Patent; Executive compensation (search for similar items in EconPapers)
JEL-codes: G30 G32 G33 G34 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:37:y:2020:i:c:s1544612319309365

DOI: 10.1016/j.frl.2019.101362

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