4. 5 Findings and Analysis
4.5.2 OLS Regression- Model 1
In Model 1, the study’s two main hypotheses and six sub-hypotheses are addressed utilizing OLS regression analysis.
4.5.2.1 Model 1a: OLS Regression- CEO Dominance and Firm Innovation Effort
Model 1a addresses Hypothesis 1 which states that there is a negative relation between CEO Dominance and innovation effort while holding corporate governance constant. Specifically that this relationship is negative between CEO Dominance and R&D expenditures, CEO Dominance and R&D/Total Sales, and CEO Dominance and R&D/Total Assets. Table 4.3 reports the OLS regression results for CEO Dominance and innovation effort for the full sample.
Hypothesis 1a states that there is a negative relation between CEO Dominance and R&D expenditures. Based on OLS regression results from Model 1a, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D expenditures is negative. Thus, Hypothesis 1a is supported. A follow up analysis by firm market capitalization, which is the total dollar market value of a firm’s outstanding shares and more commonly used by the investment community to determine a firm’s size, further reveals that this result is only significant and negative for large cap firms (refer to Appendix D2). Hypothesis 1b states that there is a negative relation between CEO Dominance and R&D/Total Sales. Based on OLS regression results from Model 1a, this relationship is statistically significant (P value <
0.05), while the coefficient of R&D/Total Sales is negative. Thus, Hypothesis 1b is supported. Furthermore, this result if only significant and negative for large cap firms (refer to Appendix D3).
Hypothesis 1c states that there is a negative relation between CEO Dominance and R&D/Total Assets. Based on OLS regression results from Model 1a, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D/Total Assets is negative. Thus, Hypothesis 1c is supported. Additionally, this result if only significant and negative for mid cap firms (refer to Appendix D4).
Table 4.3 OLS Regression: CEO Dominance and Innovation Effort
This table presents the ordinary least squares (OLS) estimation results for Hypothesis 1 using a sample of 11,416 firm year observations of U.S. firms from 1993 to 2013. The independent variable is CEO Pay Slice. The dependent variables include firm R&D expenditures (in $000,000's), R&D/Total Sales, and R&D/Total Assets. Firm CG, Firm Size, Earnings Intensity, Advertising Intensity, Firm Leverage, and Firm Investment Intensity are controlled. P-values are shown in the coloumn “Sig.”. Coefficients are shown in the column
“Coef.”. A 5% significance level is applied.
R&D Expenditures R&D /Total Sales R&D/Total Assets
Coef. Sig. Coef. Sig. Coef. Sig.
Constant -1762.575 0.000 0.221 0.000 0.132 0.000 CEO Pay Slice -239.126 0.010 -0.017 0.043 -0.014 0.003 GovScore 65.207 0.004 -0.010 0.000 -0.005 0.000 Total Assets (log) 276.522 0.000 -0.009 0.000 -0.006 0.000 EBITDA/ Assets 161.500 0.388 -0.369 0.000 -0.075 0.000 Advertise/Assets 1322.088 0.061 -0.116 0.095 0.042 0.304 Cap.Exp./ Assets 501.094 0.345 0.057 0.328 0.053 0.097 Debt/ Assets -563.88 0.000 -0.043 0.045 -0.031 0.001
Industry Dummy Yes - Yes - Yes -
Year Dummy Yes - Yes - Yes -
R2 0.401 - 0.371 - 0.401 -
No. of Observations 11,416 - 11,416 - 11,416 -
4.5.2.2 Model 1b: OLS Regression- CEO Incentive and Firm Innovation Effort
Model 1b addresses Hypothesis 2 which states that there is a positive relation between CEO Incentive and Firm Innovation effort. Specifically that this relationship is positive between CEO Incentive and innovation effort, CEO Incentive and R&D Total Sales, and CEO Incentive and R&D Total Assets. Table 4.4 reports the OLS regression results for CEO Incentive and Innovation effort for the full sample.
Hypothesis 2a states that there is a positive relation between CEO Incentive and R&D expenditures. Based on OLS regression results from Model 1b, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D expenditures is positive. Also CEO Dominance remains statistically significant (P value < 0.05) with a negative coefficient. Thus, Hypothesis 2a is supported.
Hypothesis 2b states that there is a positive relation between CEO Incentive and R&D/Total Sales. Based on OLS regression results from Model 1b, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D/Total Sales is positive. Also CEO Dominance remains statistically significant (P value < 0.05) with a negative coefficient. Thus, Hypothesis 2b is supported.
Hypothesis 2c states that there is a positive relation between CEO Incentive and R&D/Total Assets. Based on OLS regression results from Model 1b, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D/Total Assets is positive. Also CEO Dominance remains statistically significant (P value < 0.05) with a negative coefficient. Thus, Hypothesis 2c is supported.
Table 4.4 OLS Regression: CEO Incentive and Innovation Effort
This table presents the ordinary least squares (OLS) estimation results for Hypothesis 2 using a sample of 6,998 firm year observations of U.S. firms from 2007 to 2013. The independent variable is CEO Incentive13 (in $000's). The dependent variables include firm R&D expenditures (in
$000,000's), R&D/Total Sales, and R&D/Total Assets. Firm CG, Firm Size, Earnings Intensity, Advertising Intensity, Firm Leverage, and Firm Investment Intensity are controlled. P-values are shown in the coloumn “Sig.”. Coefficients are shown in the column “Coef.”. A 5% significance level is applied.
R&D Expenditures R&D /Total Sales R&D/Total Assets
Coef. Sig. Coef. Sig. Coef. Sig.
Constant -760.236 0.003 0.342 0.000 0.192 0.000 CEO Pay Slice -491.773 0.000 -0.067 0.000 -0.042 0.000 CEO Incentive 0.018 0.022 6.07E-06 0.000 3.14E-06 0.000 GovScore 76.382 0.004 -0.006 0.011 -0.003 0.021 Total Assets (log) 236.616 0.000 -0.017 0.000 -0.011 0.000 EBITDA/ Assets 79.225 0.621 -0.387 0.000 -0.101 0.000 Advertise/Assets 1377.597 0.059 -0.206 0.008 0.007 0.874 Cap.Exp./ Assets 61.734 0.898 -0.022 0.742 0.009 0.797 Debt/ Assets -535.158 0.000 -0.034 0.176 -0.025 0.021
Industry Dummy Yes - Yes - Yes -
Year Dummy Yes - Yes - Yes -
R2 0.399 - 0.409 - 0.433 -
No. of Observations 6,998 - 6,998 - 6,998 -
13 Prior studies utilize the Black-Scholes method to calculate the dollar value of restricted stocks and stock options granted to the CEO during the year (see for example Jensen and Murphy, 1990; Mehran, 1995; Deckop et al., 2006;
Sanders and Hambrick, 2007; Sun et al., 2009). Appendix D5 reports OLS results utilizing the Black-Scholes method. Results are robust to this method.