The Effect of Staggered Boards on Corporate Innovation
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Abstract
This study aims to investigate the linkage between staggered boards and corporate innovation. Corporate innovation is high risk, unpredictable, long-term, and idiosyncratic (Holmstrom, 1989). Its riskiness may be a disincentive for managers planning investment in innovation. (Amihud & Lev, 1981; Smith & Stulz, 1985; Hirshleifer & Thakor, 1992; Narayanan, 1985; Stein, 1989; Bebchuk & Stole, 1993). In our study, we expect that a staggered board helps firms to implement a stable, long-term investment policy, and therefore, foster innovation. We use the sample of S&P 1500 firms listed in the U.S. in the 1995 – 2012 period and collect the patent and citation data from the National Bureau of Economic Research (NBER) and United States Patent and Trademark Office (USPTO) patent citation database to examine our empirical tests. The empirical evidence shows that staggered boards help companies foster their innovation output. Firms with staggered boards generally have higher level of innovation; this is especially the case in firms with a smaller size, higher growth opportunities, and those either in more competitive industries or having higher research and development expenses. Moreover, our results also show that staggered board hampers a firm’s innovation output when it has poor governance structure.
