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Count on subordinate executives: Internal governance and innovation

Lei Gao, Christine X. Jiang and Mohamed Mekhaimer

Journal of Banking & Finance, 2023, vol. 154, issue C

Abstract: We investigate the relationship between internal governance and firms' innovation. We hypothesize that internal governance stemming from the difference in expected employment horizons between a CEO and her subordinate executives improves a firm's innovation. Using the age difference between a CEO and her subordinate executives as the primary measure of internal governance, we find a strong positive relationship between internal governance and firms' innovation output, and scientific and economic values. We show that the positive relation is causal and robust based on empirical tests including exogenous variation in internal governance resulting from non-forced CEO turnovers. We further show that the relationship between internal governance and innovation is more pronounced when external governance is weaker and when subordinate executives are expected to have more influence on the board. Cross-sectional analysis shows that internal governance spurs innovation in younger firms, firms led by generalist CEOs, and when the likelihood of insider successions is higher.

Keywords: Internal governance; Innovation; Executives’ horizons; Corporate governance (search for similar items in EconPapers)
JEL-codes: G30 O30 O31 O32 O34 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.jbankfin.2023.106931

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