THREE ESSAYS ON FIRST INNOVATION EFFORT: THE RELATIONSHIP WITH CORPORATE GOVERNANCE, WORKFORCE DIVERSITY AND CEO DOMINANCE. The results show a significantly negative relationship between corporate governance performance and firm innovation proxies, and no positive mediating effect of innovation effort on firm performance.
LIST OF TABLES
INTRODUCTION
Contemporary and diverse literature pays due attention to the necessity of corporate governance in the firm's innovation efforts. Key stakeholders often expect CEOs to be the primary architects of the firm's innovation agenda (Berger, Dutta, Raffel, & Samuels, 2016).
CORPORATE GOVERNANCE, INNOVATION EFFORT, AND FIRM PERFORMANCE
Introduction
Studies using broad-based measures of corporate governance provide evidence of their effects on key business outcomes. Second, the study contributes to the literature examining the effects of corporate governance on business innovation.
Prior Empirical Evidence
- Corporate Governance and Firm Innovation
- Firm Innovation and Performance
The majority tend to agree on the positive impact of effective corporate governance mechanisms on companies' innovation efforts. However, not much is known about how effective corporate governance drives the relationship between firms' innovation efforts and their performance.
Theoretical Framework and Hypothesis Development
- Corporate Governance and Firm Innovation
- Corporate Governance, Firm Innovation and Performance
Therefore, in the context of the innovative firm, effective corporate governance practices should ultimately lead to increased R&D activity. All of this suggests that corporate governance can indeed drive the relationship between a firm's innovation efforts and its performance and long-term growth.
Sample, Data and Research Method
- Sample Size
- Measurement of Firm Level Governance
- Measurement of Firm Innovation
- Measurement of Firm Performance
- Control Variables
- Empirical Approach
OLS regression is used to test the relationship between corporate governance and the survey's innovation proxies for the entire sample while controlling for firm characteristics. It is also used to test the relationship between the survey's corporate governance and firm performance for the entire sample, while controlling for firm innovation efforts and firm characteristics.
Empirical Findings
- Descriptive Statistics
- OLS Regression- Model 1
- Tobit Analysis- Model 2
Hypothesis 2a states that there is a positive correlation between innovation efforts and ROA, while holding company management constant. Hypothesis 2c states that there is a positive relationship between innovation efforts and EPSFI, while holding corporate governance constant.
Discussion of Empirical Findings
- Does Stronger Corporate Governance Mean Greater Firm Innovation Effort?
- How is Firm Performance Impacted?
According to the Tobit estimate, R&D expenditure increases by USD on average when corporate governance performance increases by 1 score point. According to the Tobit estimate, EPSFI increases by 9.4% on average when corporate governance performance increases by 1 score point.
Conclusion and Future Research
It appears that shareholders can promote effective corporate governance practices that create incentives among managers to respond to short-term expectations of financial markets, which is detrimental to long-term R&D activity. Future studies that consider the relationship between corporate governance and innovation could separately address the impact of internal versus external corporate governance mechanisms, which may provide better insight into the role and impact of each on the effort. of firms for innovation.
WORKFORCE DIVERSITY, INNOVATION EFFORT, AND FIRM PERFORMANCE
3.1 Introduction
Prior Empirical Evidence
- Workforce Diversity and Firm Innovation
- Workforce Diversity and Firm Performance
For example, Qian and Stough (2011) discuss two measures of social diversity commonly found in the literature, namely the gay index and the country of birth index (CoB), and compare their effects on regional innovation efforts. Thus, the available empirical evidence provides some evidence of how inherent and acquired diversity in the workforce could be beneficial to a firm's innovation efforts. Researchers more or less agree that greater diversity in the workplace can be beneficial to overall company performance.
For example, Richard (2000) examines the relationship between cultural diversity, business strategy and firm performance (i.e. productivity, return on equity and market performance) in the banking industry.
Theoretical Framework and Hypothesis Development
- Workforce Diversity and Firm Innovation
- Workforce Diversity and Firm Innovation and Performance Additionally, Miller and Shamsie (1996) contend that scholars taking a
Since innovation efforts are part of a firm's business strategy, this fact must be taken into account when examining how firm performance can benefit from diversity, given its business strategy. A firm pursuing a growth strategy can therefore benefit from employees who are flexible in their thinking and unlikely to be concerned about deviating from the status quo (Schuler and Jackson, 1987). In this context, a diverse workforce, where a firm's human capital brings together different skills, judgments and abilities of its employees, can be expected to enable the firm to achieve improved performance and growth by unlocking a firm's innovation process .
If hypotheses 1 and 2 are both supported, this is consistent with a mediation relationship: stronger workforce diversity leads to higher firm innovation efforts, which in turn leads to better firm performance.
Sample, Data and Empirical Approach
- Sample Size
- Measurement of Firm Level Workforce Diversity
- Measurement of Firm Innovation
- Measurement of Firm Performance
- Control Variables
- Empirical Approach
OLS regression is used to test the association between Diversity and the study's innovation effort proxies for the full sample, while controlling for fixed characteristics. It is also used to test the association between the study's innovation effort proxies and firm performance for the full sample, while controlling for diversity and firm characteristics. Tobit analysis is used to test the association between Diversity and the study's innovation effort proxies (i.e., R&D Expenditures, R&D/Total Sales, and R&D/Total Assets) for the full sample, while controlling for firm characteristics.
It is also used to test the relationship between the study's innovation effort indicators and firm performance (i.e., ROA, ROE, EPS) for the full sample while controlling for firm diversity and characteristics.
Empirical Findings
- Descriptive Statistics
- OLS Regression- Model 1
- Tobit Analysis- Model 2
- Controlling for CSR-Model 3
Based on the OLS regression results from Model 1a, this relationship is statistically significant (P value < 0.05), while the R&D/Total Assets coefficient is positive. Based on the Tobit results from Model 2a, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D/Total Assets is positive. Based on the Tobit results from Model 2b, R&D/Total Assets is statistically significant (P value < 0.05) with a positive coefficient.
Based on Tobi's results, this relationship is statistically significant (P value < 0.05), while the coefficient of R&D/Total Assets is positive.
Discussion of Empirical Findings
- Does More Workforce Diversity mean Greater Firm Innovation Effort?
- How is Firm Performance Impacted?
The study's findings suggest that, in the long term, greater workforce diversity can create a firm's sustainable competitive advantage, as it can stimulate a firm's greater innovation efforts. OLS results reveal a significant but negative relationship between a firm's innovation efforts with ROE and EPSFI. The relationship between firm's innovation effort with ROE and EPSFI is still significant but negative.
The relationship between fixed innovation effort with ROE and EPSFI is still significant, but negative.
Conclusion and Future Research
Theoretically, there is acceptance of the connection between CSR and firm performance, especially when the influence of CSR practices on firm performance is in question. As the cost of not practicing CSR has proven in recent years to be far greater than the cost of being socially responsible, the findings of the current study may reflect such a trend where overall CSR practices are able to add value, creating competitiveness and growth for the firm. Future studies considering the diversity-innovation-performance link could address this relationship by using more complete measures of innovation effort that extend beyond total R&D expenditures.
Future studies could also address the overall mediating effects of innovation effort using firm performance measures that better capture overall firm long-term performance and growth, as well as shareholder value creation.
CEO DOMINANCE AND FIRM INNOVATION EFFORT
4.1 Introduction
Prior Empirical Evidence
- Managerial Characteristics and Firm Performance
- CEO Dominance and Firm Performance
While such studies emphasize how latent tangible or intangible business factors contribute to firms' innovation efforts, more recent studies identify certain managerial characteristics that are important to firms' innovation efforts. Although the existing literature sheds light on the existence and sources of managerial characteristics that influence firms' innovation efforts, their relative importance. Such features in driving firms' innovation efforts remain to be further explored. Because innovation is essential in creating companies' competitive advantage, survival, long-term investments, and growth prospects (Lerner et al., 2011), understanding the relative importance of managerial (vs. firm) characteristics in driving corporate innovation efforts could help investors making good investment decisions from a long-term perspective.
Previous research therefore shows that CEO dominance can be an important factor in the company's innovation efforts, as the CEO is typically the most powerful member of the corporate elite (Jensen & . Zajac, 2004).
Theoretical Framework and Hypothesis Development
- CEO Dominance and Firm Innovation
- CEO Incentive and Firm Innovation
When boards and committees are more independent from the CEO, this can also alleviate agency problems between shareholders and managers (Howton et al., 2001) and lead to more effective monitoring of management decisions (see, for example, Klein, 2002; Yermack, 1996). . In this scenario, dominant CEOs could pursue short-term gains while neglecting activities that serve the company's long-term growth. In the context of the innovative firm, dominant CEOs may therefore be incentivized to serve the long-term growth needs of the firm with performance-based compensation schemes that serve the interests of shareholders.
Both hypotheses assume that the CEO is critically important to the company's success.
Sample, Data and Empirical Approach
- Sample Size
- Measurement of CEO Dominance
- Measurement of CEO Incentive
- Measurement of Firm Innovation Effort
- Control Variables
- Empirical Approach
To measure CEO dominance, the study uses CEO pay slice (CPS), which reflects a CEO's relative compensation among top executives while capturing the CEO's relative importance with respect to capabilities, contribution, or power (Jiraporn et al., 2012; Bebchuk et al. 2011; Finkelstein, 1992). The study follows Jiraporn et al. 2011) in defining the CEO pay band as the CEO's total compensation as a fraction of the combined total compensation of the five top executives (including the CEO) in a given company. R&D activities are a key component of firms' innovation efforts, as well as the most important intangible innovation expenditures (Evangelista et al., 1997).
R&D is therefore more observable and has greater potential to provide clear evidence of the interaction between CEO dominance and firms' innovation efforts.
4. 5 Findings and Analysis
- Descriptive Statistics
- OLS Regression- Model 1
- Tobit Analysis- Model 2
- Instrumental Variable Analysis- Model 3
- Discussion of the Empirical Findings
- Does stronger CEO Dominance mean weaker Firm Innovation Effort?
- Does CEO Incentive have any impact?
- Conclusion and Future Research
Model 2a addresses hypothesis 1, which states that there is a negative relationship between CEO dominance and innovation effort. The study's first research question explored the impact of CEO dominance on US firms' innovation efforts. Specifically, the first research question addresses the relationship between the level of CEO dominance and the firm's R&D expenditures, R&D/Total Sales, and R&D/Total Assets—the study's three proxies of innovation efforts.
In the Tobit estimates, a significant and negative relationship can still be observed between CEO dominance and the three innovation efforts in the study.
CHAPTER V
CONCLUSION, IMPLICATIONS AND LIMITATIONS
5.1 Conclusions
Implications for Theories and Practice
Therefore, he/she may pursue short-term profits while neglecting activities that serve the company's long-term growth. However, it is also observed that powerful CEOs can be incentivized to meet the long-term growth needs of the company with performance-related compensation plans that serve the interests of shareholders. The empirical evidence goes beyond governance settings and also provides support for a resource-based view of diversity at the firm level.
Overall, according to the study's results, workforce diversity could actually make a difference.
Limitations
Thus, in the interest of the company's innovation efforts, companies can add value through the implementation of diversity-promoting human resource management practices and work environments. For example, Chen et al., (2011) find that corporate governance mechanisms (as recommended by the OECD) do not improve the financial returns of Chinese firms, as firms in China have very different management structures compared to those in the United States. Second, the current thesis uses regression models that measure correlations between the proposed variables in the same year.
R&D is just one of many other measures of innovation discussed in the existing literature.
Empirical evidence on corporate governance in Europe: The effect on stock returns, value and firm performance. The impact of corporate governance practices on research and development efforts: A shareholder rights, cross-listing and control pyramid perspective. The effectiveness of principles-based corporate governance practices and firm financial performance: An empirical investigation.
The role of R&D investment in the relationship between corporate governance and firm performance: Empirical evidence from the Chinese IT industry.
APPENDICES
Appendix A
Appendix B1
Appendix B2
Appendix B3
Appendix B4
Appendix C1
Appendix C2
Appendix C3
Appendix C4
Appendix D1
Appendix D2
Appendix D3
Appendix D4
Appendix D5
