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Board Gender Diversity, Innovation and Firm Performance
Abstract
We find that firms with more gender-diverse boards achieve greater innovative success. The results are not driven by endogenous matching between female directors and firms with high innovative potential. To explore the mechanism, we find that the positive effect of gender diversity on innovation is stronger when product market competition is lower and when managers are more entrenched, consistent with increased oversight by female directors improving manager’s incentives to innovate. Furthermore, we observe that although gender diversity does not enhance firm value on average, it is particularly valuable for firms in which innovation and creativity play an important role.
... Managers around the world have a consensus that firms benefit from the workforce diversity (Carter et al. 2003;Erhardt et al. 2003;Liu et al. 2014;Nguyenet al. 2015). Diversity leads to outside the box thinking which builds an environment for innovativeness (Bernile et al. 2018;Chen et al. 2015;Miller and Del Carmen Triana 2009;Østergaard et al. 2011;Talke et al. 2010). ...
... A firm's innovative activities can be measured both by input variables as well as output variables. R&D investment is regarded as one of the indicators of innovation input (Chen et al. 2015;Aghion et al. 2013), while patent counts are viewed as innovation output (Carney et al. 2018). Based on the knowledge production function view of Pellegrino and Piva (2020), we have taken a relative measure of a number of patents application to the firm's R&D expenditures. ...
... This study aims to examine the relationship between board diversity and innovation in Chinese A-listed companies. Many studies in this regard have been undertaken in developed economies such as Chen et al. (2015); Miller and Del Carmen Triana (2009);Talke et al. (2010); Torchia et al. (2011) but very few have been performed in emerging economies explicitly relating board diversity with innovation (Balta et al. 2013;Galia and Zenou 2013;Nguyen et al. 2015). The Chinese market has a unique financial system with most of the companies owned by the state directly or through associates. ...
In this study, we use a sample of Chinese companies to examine the effect of board diversity on the corporate innovation measured through propensity to patents and patents conversion rate. Our findings show that corporate innovation is significantly positively associated with the female director’s share, as well as the young director’s share on the corporate boards, while we find an insignificant effect of foreign national director share on corporate innovation. Additionally, the association between board diversity and innovation is tested under different financial flexibility choices based on cash and leverage combinations. Interestingly, the positive effect of board diversity on corporate innovation is enhanced with financial flexible firm. This study has importance for the corporate board and policymakers. An increase in diversity in terms of female representation and young directors bring creativity, voice, and strive in the boardroom. The regulators are suggested to enact rules/guidelines to have a mandatory presence of females on board to enhance competition and increase transparency.
... Moreover, growth investments are important contributors to economic growth and employment in a knowledge-based economy (Aggarwal et al., 2009;Chen et al., 2015). Therefore, the current study argues that the allocation of capital raised in an IPO can be better explained from the perspective of the value-added advantage of growth investments, rather than the risk and uncertain returns associated with growth investments. ...
... For example, Miller and Triana (2009) and Rossi et al. (2017) find that women in the boardroom have a significantly positive Women on corporate boards impact on investment in R&D. Chen et al. (2015) find that regardless of whether or not companies have innovation potential, women on the corporate board foster innovation. Further studies have also recognised that women on corporate boards are associated with improvement in company value and legitimacy (Brammer et al., 2009;Campbell and Mínguez-Vera, 2008;Ding and Charoenwong, 2013;Gavious et al., 2012;Gyapong et al., 2016;Gul et al., 2011). ...
... In a cross-sectional sample of board of directors of 1,024 US public-listed companies, Adams and Ferreira (2009) show that women on corporate boards have better board meeting attendance records, and are more likely to join monitoring-related committees than male directors. Moreover, increased monitoring by women on the board improves the manager's incentives to innovate (Chen et al., 2015). ...
Purpose
The purpose of this paper is to examine whether the differences in men and women, such as risk aversion in decision making, can influence the amount of capital that the board of directors can allocate for investment opportunities.
Design/methodology/approach
This study sampled 212 IPOs over the period of 2005–2015 and employed the OLS and the quantile regression techniques to examine the impact of female directors on capital allocation.
Findings
The results show that women on corporate boards have a positive influence on the amount of capital an IPO company can allocate for investment opportunities. These findings suggest that the investment strategies of women in an emerging financial market, like Malaysia, may differ from women in other financial markets.
Practical implications
The presence of women on corporate boards plays an important role in board involvement in a company’s strategic decision at the time of the IPO. Therefore, regulators and IPO issuers should pay close attention to the corporate governance structure of a company at the time of an IPO. In addition, investors and other stakeholders of a company may consider women on corporate boards as an important factor in financing and investment decisions.
Originality/value
Despite several studies that have examined the influence of women on corporate boards on corporate outcomes, globally, the presence of women on corporate boards and their influence on corporate decision-making related to allocation of capital to investment opportunities, have not been fully explored in the IPO literature.
... Over the last three decades, the increasing debate on the economic consequences of board gender diversity (BGD, hereafter) has been far from resolved. The role of a firm's board is to monitor management in an effective way, align the interest of managers and stakeholders and strategically guide the decision-making process of the firm to enhance the corporate performance ( Conyon and He, 2017;Pellegrini and Sironi, 2017;Chen et al., 2015;Lee et al., 2014;Adams et al., 2010;Finkelstein et al., 2009). A strong and well-articulated corporate board is considered as a powerful strategic resource, with the help of which firms can get competitive advantage over their rivals, benefit from directors' knowledge and experience, build connections in the business world, get access to financial resources, as well as explore new geographical and industrial markets (Palmberg et al., 2009). ...
... The underlying institution of the beneficial impact of BGD follows that females are mostly risk averse, show less assertiveness and meet ethical standards (e.g. Chen et al., 2015). Female directors keep corporate debt at a low level (e.g. ...
Purpose
The purpose of this paper is to study whether the presence of women directors on the corporate board influences financial performance (FP). To examine the underlying causal mechanism, the authors modeled firm-level intellectual capital efficiency (ICE) in the relationshipbetween board gender diversity (BGD) and FP.
Design/methodology/approach
Using a sample of 5,879 US firms, a structural model of BGD, IC and FP is conceptualized by accounting for the endogeneity issues and alternative measures of the key variables in the empirical framework. In the model, the percentage of women directors is taken as BGD measures and value-added intellectual coefficient as an IC performance measure, considering governance and corporate performance measures.
Findings
The authors find a significant impact of BGD on FP. In particular, the results suggest: BGD is linked to IC; the influence of board gender diversity on the FP is indirect; and ICE fully mediates the relationship between BGD and FP.
Originality/value
To the best of the author’s knowledge, no study has empirically investigated whether the firm-level IC performance explains the influence of BGD on FP. Drawing on the resource-based view and organizational learning theory of the firm, the authors empirically modeled the relationship between BGD and FP through a mediation mechanism of firm-level ICE to fill the void in the literature.
... Other studies (e.g., Orser et al., 2010;Marques, 2015) have suggested that different export propensity between firms led by women and men may be a reason for the gender gap. Chen, Leung, and Evans (2015), among others, indicated that the innovative potential of a firm and the propensity to invest in research and development and introduce innovation may be affected by the gender composition of ownership and management. Finally, women-led businesses could be at a disadvantage compared to similar men-led firms when it comes to access to government-sponsored support programs that can foster firm productivity. ...
... We considered the possibility of a gender gap in a firm's propensity to innovate, assuming women may be more risk averse (Croson and Gneezy, 2009;Dohmen et al., 2011) and, therefore, less prone to innovate (Chen et al., 2015). Table 6.8 shows that the empirical evidence did not support this assumption. ...
This monograph explores productivity, innovation, and firm performance, important issues that affect private sector development in the Caribbean region. Using unique and recently available datasets consisting of more than 4,000 surveys at the firm level, and covering 13 Caribbean countries, it examines a set of variables that affect productivity and innovation in the region. The chapters provide a unique perspective on the barriers to innovation, and on how access to finance, competition, foreign direct investment, gender, access to electricity, and public programs affect productivity and innovation at the firm level. The publication culminates with a review of the policy interventions that could have the most impact in increasing firm performance within the region.
... Eckel and Grossman, 2002;Hirshleifer et al., 2012). However, other studies indicate that female representation, especially in top management teams, increases the number of new innovative ideas, promotes creativity, and improves board diligence, independence, and informativeness (Dezso and Ross, 2012;Chen et al., 2015). ...
This paper aims to enlarge our understanding of how the creative industries affect an economy’s innovation activities both by developing and introducing innovations as part of their business activities and stimulating innovation in other sectors. It applies a two-stage analysis. As to the first stage, it attempts to identify the innovation determinants of creative firms considering several characteristics of their founders and employees and different types of knowledge sources. In the second stage, the paper seeks to explore whether and how creative firms’ innovative output helps their business clients from other (creative or non-creative) industries to innovate accounting for endogeneity issues. Our analysis is based on more than 1000 firms operating in various creative industries in 5 European countries (Italy, UK, Sweden, Denmark, Greece). The main findings in the first stage of the analysis suggest that younger founders and employees with creativity expertise are significantly associated with an increased probability of creative firms introducing both product and process innovation. In the second stage of analysis, we provide strong empirical evidence that creative industries support innovation in the wider economy. We show that the innovation output of creative firms constitutes a crucial input for the innovativeness of their business clients from other (creative or non-creative) industries.
... Diversified boards through active monitoring and board heterogeneity result in low managerial appropriations and efficient funds utilization (Hamzah and Zulkafli, 2014). Many studies in this regard have been undertaken in developed economies such as Adams and Ferreira (2009), Ruigrok et al. (2007); Arena et al. (2015) and Chen et al. (2015), but very few have been performed in developing economies explicitly relating board diversity with CSR. The literature on CSR has been explored from the perspective of different theoretical evidence. ...
Purpose
This study aims to examine the determinants of the female representations on Chinese listed firm’s boards. This study also investigates the effect of gender diversity on corporate social responsibility activities.
Design/methodology/approach
The Tobit regression model is used because the data is censored and using ordinary least square regression can give spurious results. For robust check, the authors also used Heckman’s (1979) two-stage self-selection model to remove the sample self-selection bias.
Findings
The authors find that the female representations on the corporate board are positively associated with firm age, firm performance, corporate governance, family ownership, institutional ownership and managerial ownership while negatively related to firm size and state ownership. This study also incorporates predictors of the critical mass of women on the Chinese listed firm’s board. The study also tests the female-led hypothesis and concludes that the female representation increases in firms with female chief executive officer (CEO) or female chairpersons. The Chinese listed firms with gender-diverse board are socially responsible.
Research limitations/implications
The importance of diversity in corporate boards has been demonstrated in light of the agency theory and the resource dependence framework. The results contribute to the previous literature by documenting the determinants of female representations on board, robust by alternative measures of gender diversity, firm size, corporate governance and estimation techniques.
Practical implications
The economic significance of gender diversity stirred the firms to increase female representation. The policymakers can understand the reasons for female underrepresentation in Chinese boards and can reform the regulation to enhance governance quality, non-state ownership and risk aversion among the listed firms.
Originality/value
This study contributes to the literature by providing empirical evidence on the key predictor of the world’s largest emerging economy, specifically the study focuses on the firm specific determinants, different governance attributes, ownership structure and firm risk measures. This study also seeks to answer if the presence of a female in the Chairperson or CEO position encourages the firms to hire more female directors or not?
... Perhaps the greatest efforts in recent years, in part stimulated by policymakers and media, have been on the economic importance of gender diversity on boards. Prior evidence has shown an impact of gender diversity on corporate financial performance (Adams and Ferreira 2009); patent outcomes (Chen et al. 2015); radical innovation (Díaz-García et al. 2013); creativity (Baer et al. 2014); and fraud reduction (Cumming et al. 2015), consistent with other theory and evidence that women make financial decisions in ways that are distinct from men (Agnew et al. 2008, Barber andOdean 2001). For example, women are more ethically sensitive (e.g., Bruns and Merchant 1990, Cohen et al. 1998, Owhoso 2002, Sundén and Surette 1998; have less tolerance for failure (Jenkins et al. 2014); exhibit more risk aversion (Barber andOdean 2001, Byrnes et al. 1999); and mitigate isolated group think (Abbott et al. 2012). ...
Research Question/Issue
What are the causes and consequences of board diversity on innovation across a broad array of different types of diversity (education level, gender, and age), while controlling for director expertise in science and business? How do these different types of diversity affect innovation in different industry contexts?
Research Findings/Insights
We use regional demographics in China (e.g., there are in fact differences in the proportion of females by region) to instrument board characteristics. We find that gender diversity is more pertinent in facilitating innovation in male-dominated industries, not female-dominated industries. In low-tech and nonpatent intensive industries, all types of diversity facilitate innovation, whereas in high-tech and patent intensive industries, scientific experience matters more than types of diversity. We find some evidence that age diversity results in lower-quality patents, while boards with science expertise have higher-quality patents.
Theoretical/Academic Implications
We develop unique tests to control for endogeneity of diversity in innovation by exploiting regional differences in demographics. The theory and evidence suggest that specific types of diversity matter for innovation to the greatest degree where the industry is characterized by the absence of that characteristic.
Practitioner/Policy Implications
We examine the broad context of diversity in organizations and examine whether there is a gap in firm's diversity insofar as we can infer that diversity explains innovative activity within organizations. By identifying which types of diversity matter for organizations, appropriate policy responses can be identified to enhance innovation.
... Gender diversity also influences financial performance. These include, among other things, patent results (Chen et al, 2015), and reducing fraud (Cumming, Leung, & Rui, 2015) . Gender diversity can also control team productivity so that it is on time and the cost does not exceed the budget. ...
... Nevertheless, empirical research suggests that gender diversity is positive for firm innovation (e.g. Østergaard et al., 2011;EY, 2016) while female representation at top management teams is found to increase the range and number of available ideas and perspectives, promote creativity and improve board diligence, independence and informativeness leading, therefore, to increased innovation performance (Deszӧ and Ross, 2012; Chen et al., 2015). In addition, a recent empirical study based on US venture capital data points out that investments in companies with at least one female founder meaningfully outperformed investments in all-male founding teams highlighting that women can be add value to technology entrepreneurial teams (Marion, 2016). ...
This paper explores the effect of diverse firm resources and competences such as founders’ human capital, workforce human capital and acquisition of knowledge from external sources on the innovation performance of young firms. The empirical analysis is based on data from a rich European survey that examined small firms between three and ten years of age across a wide industrial spectrum of knowledge-intensive services and manufacturing sectors in ten countries. The study provides evidence that aspects of both internal factors, especially those encapsulated in the human capital of founders such as prior exposure to R&D, team functional diversity and educational background, and external firm characteristics, such as technology collaborations and networking with universities are important in explaining young firms’ innovative activity.
... Studies on gender diversity at the top management level have shown that females are less reluctant to undertake high risk and unpredictable innovation activities compared to their male counterparts (Galasso and Simcoe, 2011;Hirshleifer et al., 2012). However, other empirical studies indicate that female representation at top management teams increases the range and number of available ideas and perspectives, promotes creativity and improves board diligence, independence and informativeness leading, therefore, to increased innovation performance (Deszo and Ross, 2012; Chen et al., 2015). ...
This paper explores the innovative performance of firms active in the creative industries (CIs). It identifies potential differentials in various innovation indicators between CI and non-CI young firms and examines drivers of the innovative performance of firms in the creative sectors. Our findings suggest that firms in the CIs outperform those in non-CIs both in terms of product innovation and R&D intensity, but not in terms of process and organisational innovation. Empirical analysis also suggests that the human capital of the founders as well as specific firm characteristics play a significant role in the innovative activity of firms in the CIs.
... They offer gender as an important dimension of team diversity. The theoretical literature suggests that the inclusion of women on boards promotes better monitoring and governance (Adams and Ferreira 2009), lessens conflict (Nielsen and Huse 2010), strengthens networking and mentoring (Terjesen et al. 2009), enhances transparency (Gul et al. 2011) and spurs innovation (Miller and Triani 2009;and Chen et al. 2015). Such arguments point to stronger returns in gender-diverse firms. ...
Issues of social justice underlie the clamour for greater gender balance in top-management. The present study reveals that pursuit of such social justice is also value-enhancing in relation to the longer-run performance of initial public offerings (IPO) stocks, especially where female board members are unencumbered by family-connection with other directors. This study examines the economic benefits of board gender diversity for state- and privately controlled firms in the Hong Kong IPO market. Gender board diversity is much less common in state-run IPO firms. Within the subset of privately controlled IPO firms, distinction exists between entities that accommodate family-connected board officers and those that do not. Specifically, this study focuses on family-ties between board members. This issue allows for finer-grained assessment of family influence on firm performance. Stronger post-listing stock, return-on-assets and sales-on-assets performance arise in (1) privately controlled firms without family-connected board members and in (2) state-run entities. Gender diversity thus serves as a positive, but only when female director presence is untrammelled by family associations between directors. However, there is little evidence of a link between female board representation and IPO underpricing. Relative to state-backed issuers, privately controlled firm boards accommodate more women, younger officers and a broader mix of nationalities, but appear more-inclined to unify CEO and chair positions. Board duality, the fraction of independent directors and directors’ age and nationality exhibit little relation with initial and aftermarket stock returns. In prescriptive terms, minority investors gain from the inclusion of female directors, especially when IPO firm directors are unencumbered by family-affiliation with other board members. Results therefore add to the clarion of calls for greater female board presence.
... Following the rationale provided by Malmendier and Tate (2008) and the methodology of Campbell et al. (2011), we use the Holder 67 variable as an indicator of CEO overconfidence. 14 Chen et al. (2015) show that firms with more gender-diverse boards achieve greater innovative success. We therefore also include Fraction of female directors to capture board gender diversity. ...
We find strong evidence that firms with employee-friendly workplaces achieve greater innovative success, particularly in industries where innovation is more difficult to achieve. Furthermore, employee-friendly firms were also more inclined to sustain R&D investment during the recent crisis. These findings are consistent with the view that an employee-friendly workplace helps to develop tolerance for failure, which encourages engagement in innovation. We find no support for alternative explanations, such as employee-friendly workplaces helping to attract and retain talented employees and reducing career concerns of executives, which could nurture innovation.
Purpose
The study aims to pervade the gap in the domain of risk disclosure and gender diversity, which is comparatively uncharted. Gender diversity being a crucial element of corporate governance can deepen understanding on the issue in the backdrop of a developing country such as India, so this study aims to investigate the relationship between gender diversity on board and corporate risk disclosure.
Design/methodology/approach
Four measures of gender diversity, i.e. BLAU index, SHANNON index, proportion of women directors on board and female dummies, have been deployed to measure gender diversity. The empirical analysis is premised on a sample of S&P BSE 100 index pertaining to the 2018–2019 financial year; which eventually gets reduced to 70 non-financial firms after eliminating 30 financial firms. To examine the impact of gender diversity on corporate risk disclosure, hierarchical regression has been used. Additionally, two-stage least square regression analysis has been performed for checking the endogeneity issues in data and validating the findings of the study.
Findings
The main findings unveil that gender diversity positively impacts corporate risk disclosure. Confirming the agency theory and resource dependency theory, its alternative measures like BLAU index, SHANNON index, proportion of women directors and female dummy divulged to positively impact corporate risk disclosure. When women dummy has been used, analysis unmasked that firms electing more than one female director on board has a higher positive impact on corporate risk disclosure as compared to firms engaging only one women director on board.
Research limitations/implications
The study is undertaken in the Indian settings, which has its own set of legislative laws, whereas there is need to reaffirm the relationship applying cross-country analysis. Furthermore, there is huge hollowness in the domain of gender diversity and risk disclosure that calls for empirical evidence to unearth futuristic vision.
Practical implications
The research presents managerial implications for the managers to promote gender egalitarianism by electing higher quantum of women directors on board to achieve global standards of maintaining higher risk disclosure. Adequate risk disclosure on a gender-diverse board further assures the investors that their interest will remain intact in the organization that meets legal requirements by embracing gender equality in employment. A woman in the boardrooms incarnates transparency through divulgence of risk information, which suffices the informational needs of investors. In addition, the findings insists the regulators towards staunch enforcement of effective corporate governance practice through increasing the proportion of women directors on board as they assist in dispelling risk disclosure, which will avert sceptical ambitions of managers and deconstruct their stereotype attitude towards women.
Originality/value
This study is a novel contribution in expanding the risk disclosure literature by analyzing the unexplored impact of gender diversity on the extent of corporate risk disclosures in India.
Our understanding of the link between women managers and firm-level innovation remains incomplete. Building on recent research on gender and leadership styles, we argue that there is a positive association between women managers and firm innovation. We highlight the selection process of women managers as an important underlying mechanism and discuss institutional and environmental contingencies as factors that influence this association. Specifically, we theorize and garner empirical support for the idea that in countries with legislation that promotes legally-mandated gender quotas, underqualified women may be selected for management positions, whereas in countries with voluntary gender quotas (or quotas are entirely absent), women are predominantly selected on the basis of their qualifications. The association between women and innovation is strengthened (weakened) in the latter (former) case. We also argue that this positive relationship is stronger under conditions of environmental complexity, which typically characterize innovation activities. These predictions are supported on the basis of data from the Management, Organization and Innovation (MOI) survey which covers manufacturing firms in twelve countries.
We find that corporate innovation is positively related to board diversity as measured by a multidimensional index. The benefit of board diversity is more pronounced for firms with more complex operations, more experienced boards, and stronger external governance, suggesting that diverse boards have superior advising capacity. We find evidence to suggest that firms with diverse boards engage in more exploratory innovations and develop new technology in unfamiliar areas. As a result, they create a larger number of both most-cited and uncited patents. Finally, of the six different aspects of board diversity, professional diversity matters the most for corporate innovation.
This essay bridges together social network and institutional perspectives to examine how women on boards, by breaking up directors’ homophilous (e.g., all-male) networks, contribute to board effectiveness. It proposes that through real and symbolic representations, women enhance perceptions of the board’s instrumental, relational, and moral legitimacy, leading to increased perceptions of the board’s trustworthiness which in turn fosters shareholders’ trust in the firm. Envisioning the gender diversification of boards as an event of institutional change, this article considers the critical role of shareholder activists and legislative support from the SEC in the deinstitutionalization of old boys’ networks and the reinstitutionalization of gender diverse boards. This work is substantiated with evidence obtained through 34 semi-structured interviews, archival and documentary evidence.
Empirical work on the causes and effects of inventive activity has had difficulty in finding measures that can indicate when and where changes in either inventive inputs or inventive output have occurred. The recent computerization of the U.S. Patent Office's data base may prove helpful in this context, but there is the problem that a priori we do not know the relationships between patent applications and economically meaningful measures of these inputs and outputs. To help solve this problem, this paper investigates the dynamic relationships among the number of successful patent applications of firms, a measure of the firm's investment in inventive activity (its R & D expenditures), and an indicator of its inventive output (the stock market value of the firm). Economics Version of Record
We explore the usefulness of patent citations as a measure of the "importance" of a firm's patents, as indicated by the stock market valuation of the firm's intangible stock of knowledge. Using patents and citations for 1963--1995, we estimate Tobin's q equations on the ratios of R&D to assets stocks, patents to R&D, and citations to patents. We find that each ratio significantly affects market value, with an extra citation per patent boosting market value by 3%. Further findings indicate that "unpredictable" citations have a stronger effect than the predictable portion, and that self-citations are more valuable than external citations. Ordering information: This article can be ordered from https://pubs3.rand.org/cgi-bin/rje/pdf.cgi .
The monitoring role performed by the board of directors is an important corporate governance control mechanism, especially
in countries where external mechanisms are less well developed. The gender composition of the board can affect the quality
of this monitoring role and thus the financial performance of the firm. This is part of the “business case” for female participation
on boards, though arguments may also be framed in terms of ethical considerations. While the issue of board gender diversity
has attracted growing research interest in recent years, most empirical results are based on U.S. data. This article adds
to a growing number of non-U.S. studies by investigating the link between the gender diversity of the board and firm financial
performance in Spain, a country which historically has had minimal female participation in the workforce, but which has now
introduced legislation to improve equality of opportunities. We investigate the topic using panel data analysis and find that
gender diversity – as measured by the percentage of women on the board and by the Blau and Shannon indices – has a positive
effect on firm value and that the opposite causal relationship is not significant. Our study suggests that investors in Spain
do not penalise firms which increase their female board membership and that greater gender diversity may generate economic
gains.
This paper summarizes a number of studies which use patent data to examine different aspects of technological change. It describes our firm level data set construction effort; reports on the relationship between RLD expenditures and the level of patenting; analyzes the relationship between patents, R&D, and tire stock market value of firms; reports on the estimation of the value of patent rights based on European patent renewal data; and describes the use of patent data to estimate the importance of R&D spillovers. It concludes that patent data represent a valuable resource for the analysis of technological change. They can be used to study longer-run interfirm differences in inventive activity and as a substitute for R&D data where they are not available in the desired detail. It is possible also to use a firm's distribution of patenting by field to infer its position in "technological space" and use it in turn to study how R&D spills over from one firm to another. Moreover, patent renewal data, which are also becoming available in the U.S., allow one to construct more relevant "quality weighted" inventive "output" measures .
We examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation. Recent survey evidence suggests that semiconductor firms do not rely heavily on patents to appropriate returns to R&D. Yet the propensity of semiconductor firms to patent has risen dramatically since the mid-1980s. We explore this apparent paradox by conducting interviews with industry representatives and analyzing the patenting behavior of 95 U.S. semiconductor firms during 1979-1995. The results suggest that the 1980s strengthening of U.S. patent rights spawned "patent portfolio races" among capital-intensive firms, but it also facilitated entry by specialized design firms.
We study whether a firm’s capital structure decisions are affected by the risk that its product market rivals could gain access to its “trade secrets.” Our tests exploit the staggered recognition of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous event that increases the protection of a firm’s trade secrets by preventing the firm’s workers who have knowledge of its trade secrets from working for a rival firm. We find that firms increase their financial leverage after courts in their state of location recognize the IDD, especially firms in more competitive industries, with more workers who know trade secrets, or that face a greater ex-ante risk of losing key employees to rivals. Also, firms’ borrowing costs decrease after the recognition of the IDD, implying that credit markets price the risk that a firm’s rivals could obtain its trade secrets. Finally, firms experience gains in market share following the recognition of the IDD in their state. Overall, our results imply that the risk of losing intellectual property to rivals is an important competitive threat that leads firms to choose more conservative capital structures.
This paper examines the effect of board gender diversity on firm performance in China's listed firms from 1999 to 2011. We document a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors, indicating that the executive effect outweighs the monitoring effect. Moreover, boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors, consistent with the critical mass theory. Finally, we find that the impact of female directors on firm performance is significant in legal person-controlled firms but insignificant in state-controlled firms. This paper sheds new light on China's boardroom dynamics. As governments increasingly contemplate board gender diversity policies, our study offers useful empirical guidance to Chinese regulators on the issue.
This paper examines the impact of the conglomerate form on the scale and novelty of corporate Research and Development (R&D) activity. I exploit a quasi-experiment involving failed mergers to generate exogenous variation in acquisition outcomes of target firms. A difference-in-differences estimation reveals that, relative to failed targets, firms acquired in diversifying mergers produce both a smaller number of innovations and also less-novel innovations, where innovations are measured using patent-based metrics. The treatment effect is amplified if the acquiring conglomerate operates a more active internal capital market and is largely driven by inventors becoming less productive after the merger rather than inventor exits. Concurrently, acquirers move R&D activity outside the boundary of the firm via the use of strategic alliances and joint ventures. There is complementary evidence that conglomerates with more novel R&D tend to operate with decentralized R&D budgets. These findings suggest that conglomerate organizational form affects the allocation and productivity of resources.
This paper identifies an important factor in assessing the likelihood of corporate wrongdoing — the connection a CEO has with her top executives developed through their appointment decisions during her tenure. A sample of publicly-listed firms over the period 1996-2006 reveals that CEO connectedness within executive suites increases the likelihood of committing frauds and decreases the likelihood of detecting frauds. We identify several channels through which CEO connectedness decreases expected costs of committing fraud — by hindering and delaying detection, by reducing the likelihood of CEO dismissal upon fraud discovery, and by lowering the coordination costs of carrying out illegal activities. Furthermore, standard monitoring mechanisms do not seem to mitigate the adverse effects on frauds, suggesting regulators, investors, and governance specialists should pay particular attention to the CEO’s influence over top executives developed through appointments decisions.
This paper investigates the effects of going public on innovation. Using a data set consisting of innovative
firms that
filed for an initial public offering (IPO), I compare the long-run innovation of
firms that completed their filing and went public with that of
firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach reveals a complex trade-off between public and private ownership. The quality of internal innovation of public firms declines by 50 percent relative to
firms that remained private, measured by standard patent-based metrics. Public firms experience both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows
firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions.
This paper examines the association between the presence of female directors on a corporate board and mergers and acquisitions (M&As). Using acquisition bids initiated by S&P 1500 firms during the period 1997-2009, we find that each ten percent of female directors on a board is associated with a reduction in the number of a company’s acquisition bids by 7.6 percent. Furthermore, using over 450 acquisition bids for which we have data on bidder and target firm characteristics and their boards, we find that each ten percent of female directors on a bidder board is associated with a reduction in the bid premium by 15.4 percent. We discuss possible interpretations of our findings.
How are job satisfaction and firm value linked? I tackle this long-standing management question using a new methodology from finance. I study the effect on firm-level value, rather than employee-level productivity, to take into account the cost of increasing job satisfaction. To address reverse causality, I measure firm value by using future stock returns, and control for risk, firm characteristics, industry performance, and outliers. Companies listed in the "100 Best Companies to Work For in America" generated 2.3-3.8%/year higher stock returns than their peers from 1984-2011. These results have three main implications. First, consistent with HRM theories, job satisfaction is beneficial for firm value. Second, corporate social responsibility can improve stock returns. Third, the stock market does not fully value intangible assets, and so it may be necessary to shield the manager from short-term stock prices to encourage long-run growth.
Around the world, policy makers are mandating gender quotas in the boardroom. Since the benefits and costs of quotas accrue to shareholders, it is important to see how they react to the appointment of female directors. Using unique data on new director appointments, we find that on average shareholders appear to value the addition of female directors. This suggests that tokenism is not the main reason firms appoint female directors. However, the stock price reaction varies with industry, firm and hiring board characteristics. Thus, some firms benefit more than others from the addition of female directors. We discuss potential policy implications of these findings.
В статье производится анализ агрегированной производственной функции, вводится аппарат, позволяющий различать движение вдоль такой функции от ее сдвигов. На основании сделанных в статье предположений делаются выводы о характере технического прогресса и технологических изменений. Существенное внимание уделяется вариантам применения концепции агрегированной производственной функции.
In this article, we review and evaluate recent management research on the effects of different types of diversity in group composition at various organizational levels (i.e., boards of directors, top management groups, and organizational task groups) for evidence of common patterns. We argue that diversity in the composition of organizational groups affects outcomes such as turnover and performance through its impact on affective, cognitive, communication, and symbolic processes.
A model of the determinants of chief executive (CEO) compensation is presented and tested. Based on a sample from the leisure industry, the study finds that CEO pay has complex links to several factors: firm size, complexity, performance, CEO power, board vigilance, and the CEO's human capital. The study includes a separate examination of CEO salary and bonus, as well as a test of pay determination across McEachern's (1975) ownership categories.
This study extends prior research on the average level of moral development in public accounting by examining five large accounting firms and three staff levels. The research is important because it highlights the need to include auditors from several firms in research designs, provides evidence of differences in moral development among public accounting firms, and profiles the professions average level of moral development for three levels. The data are from 494 managers and seniors (204 females and 290 males) from five Big Six firms. Using the Defining Issues Test (Rest, 1979a) to measure moral development, several results were noted. First, the results indicate a difference in the average level of moral development among firms, suggesting that use of subjects from only one firm inhibits the generalizability of findings regarding moral development. Second, female managers are at a significantly higher average level of moral development than male managers. In fact, the average scores for male managers fell between those expected for senior high school and college students. The data suggest that a greater percentage of high-moral-development males and low-moral-development females are leaving public accounting than their respective opposites. These results indicate that the profession has retained, through advancement, males who are potentially less sensitive to the ethical implications of various issues. The analysis also indicates that Kohlberg's (1969) theory of moral development is not biased toward the though processes of males since female auditors did not score lower on the Defining Issues Test.
Whereas the majority of research on board diversity explores the direct relationship between racial and gender diversity and firm performance, this paper investigates mediators that explain how board diversity is related to firm performance. Grounded in signalling theory and the behavioural theory of the firm, we suggest that this relationship operates through two mediators: firm reputation and innovation. In a sample of Fortune 500 firms, we find a positive relationship between board racial diversity and both firm reputation and innovation. We find that reputation and innovation both partially mediate the relationship between board racial diversity and firm performance. In addition, we find a positive relationship between board gender diversity and innovation.
We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection.
This study argues that developed capital markets, through their monitoring and disciplining role, can significantly influence innovation and economic growth. Specifically, it examines how strong corporate governance proxied by the threat of hostile takeovers affects innovation. It uses a panel of 13,339 firms over the 1976-2000 period, patents and patent citations to measure the quantity and quality of innovation, and the enactment of state antitakeover laws as an exogenous decrease in the threat of hostile takeovers. It finds a decline in innovation for firms incorporated in states that pass antitakeover laws relative to firms incorporated in states that do not. Most of the impact of antitakeover laws on innovation occurs two or more years after they are enacted, indicating a causal effect. The negative effect of antitakeover laws is mitigated by the presence of alternative governance mechanisms such as large shareholders, pension fund ownership, financial leverage, and product market competition.
Executive compensation and corporate governance problems need to be seen in a larger historical context than is commonly done. The proximate causes of corporate scandals and executive pay problems have been identified, but the real drivers have not. A need for corporate restructuring, which emerged already in the 1970s, led to the remarkable rise in shareholder influence and the relentless pursuit for shareholder value. It placed exceptional demands on boards and led to extreme pay schemes that appear to have served the restructuring purposes well, but had unintended and unfortunate side-effects. In contemplating pay and governance reforms, it is essential to keep in mind the longer chain of events to avoid naive corrective measures that do not take into account the information and incentive constraints under which the various constituents and bodies in the larger governance system, especially the boards and shareholders, operate. Some of the recent advice on executive compensation seems very misguided in a longer historical perspective as is the push for extensive shareholder intervention rights.
Busy directors have been widely criticized as being ineffective. However, we hypothesize that busy directors offer advantages for many firms. While busy directors may be less effective monitors, their experience and contacts arguably make them excellent advisors. Among IPO firms, which have minimal experience with public markets and likely rely heavily on their directors for advising, we find busy boards to be common and to contribute positively to firm value. Moreover, these positive effects of busy boards extend to all but the most established firms. Benefits are lowest among Forbes 500 firms, which likely require more monitoring than advising.
We examine the effects of financial analysts on the real economy in the case of innovation. Our baseline results show that firms covered by a larger number of analysts generate fewer patents and patents with lower impact. To establish causality, we use a difference-in-differences approach that relies on the variation generated by multiple exogenous shocks to analyst coverage, as well as an instrumental variable approach. Our identification strategies suggest a negative causal effect of analyst coverage on firm innovation. The evidence is consistent with the hypothesis that analysts exert too much pressure on managers to meet short-term goals, impeding firms’ investment in long-term innovative projects. We further discuss possible underlying mechanisms through which analysts impede innovation and show that there is a residual effect of analysts on innovation even after controlling for these mechanisms. Our paper offers novel evidence on a previously under-explored adverse consequence of analyst coverage — its hindrance to firm innovation.
We aim to tackle the longstanding debate on whether stock liquidity enhances or impedes firm innovation in this paper. This topic is of particular interest to firm stakeholders and regulators, because innovation is crucial for firm and national level competitiveness and stock liquidity can be altered by financial market regulations. We use a difference-in-differences approach that relies on the exogenous variation in liquidity generated by regulatory changes in the cost of trading stocks and find that an increase in liquidity causes a reduction in future innovation. We then identify two possible mechanisms through which liquidity impedes innovation: increased exposures to hostile takeovers and higher presence of institutional investors who do not actively gather information about firm fundamentals or monitor. Both could result in a cut in investment in innovation to boost current earnings. Our paper shows a previously under-identified adverse consequence of liquidity: its hindrance to promoting firm innovation.
Using a questionnaire derived from previous research, MBA students in a semester-long negotiation course rated 30 deceptive negotiation tactics on a 7-point appropriate–inappropriate scale. Factor analysis of these ratings yielded five primary factors (replicating previous findings) representing a lay model of unethical tactics in negotiation contexts. The emergent factors are: I, traditional competitive bargaining; II, attacking an opponent's network; III, misrepresentation/lying; IV, misuse of information; and V, false promises. The five factors may be reliably measured using a 16-item questionnaire, introduced here, called the ‘Self-reported Inappropriate Negotiation Strategies Scale’, (or SINS scale). Analyses of scale ratings by participant demographics yielded some interesting results including: a tendency for women to be more averse to questionable tactics than men; a greater willingness for self-rated ‘competitive’ individuals to endorse such tactics; and differences in willingness to endorse tactics according to variables such as undergraduate major, years of work experience, and nationality. Willingness to endorse less ethical tactics did not directly relate to actual negotiation performance. Directions for future research, and further uses of the SINS scale, are discussed. Copyright © 2000 John Wiley & Sons, Ltd.
Are the attitudes and beliefs of chief executive officers (CEOs) linked to their firms' innovative performance? This paper uses a measure of overconfidence, based on CEO stock-option exercise, to study the relationship between a CEO's “revealed beliefs” about future performance and standard measures of corporate innovation. We begin by developing a career concern model where CEOs innovate to provide evidence of their ability. The model predicts that overconfident CEOs, who underestimate the probability of failure, are more likely to pursue innovation, and that this effect is larger in more competitive industries. We test these predictions on a panel of large publicly traded firms for the years from 1980 to 1994. We find a robust positive association between overconfidence and citation-weighted patent counts in both cross-sectional and fixed-effect models. This effect is larger in more competitive industries. Our results suggest that overconfident CEOs are more likely to take their firms in a new technological direction.
This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.
We show that female directors have a significant impact on board inputs and firm outcomes. In a sample of US firms, we find that female directors have better attendance records than male directors, male directors have fewer attendance problems the more gender-diverse the board is, and women are more likely to join monitoring committees. These results suggest that gender-diverse boards allocate more effort to monitoring. Accordingly, we find that chief executive officer turnover is more sensitive to stock performance and directors receive more equity-based compensation in firms with more gender-diverse boards. However, the average effect of gender diversity on firm performance is negative. This negative effect is driven by companies with fewer takeover defenses. Our results suggest that mandating gender quotas for directors can reduce firm value for well-governed firms.
We study the effects of the intensity of board monitoring on directors' effectiveness in performing their monitoring and advising duties. We find that monitoring quality improves when a majority of independent directors serve on at least two of the three principal monitoring committees. These firms exhibit greater sensitivity of CEO turnover to firm performance, lower excess executive compensation, and reduced earnings management. The improvement in monitoring quality comes at the significant cost of weaker strategic advising and greater managerial myopia. Firms with boards that monitor intensely exhibit worse acquisition performance and diminished corporate innovation. Firm value results suggest that the negative advising effects outweigh the benefits of improved monitoring, especially when acquisitions or corporate innovation are significant value drivers or the firm's operations are complex.
We show that stock prices of firms with gender-diverse boards reflect more firm-specific information after controlling for corporate governance, earnings quality, institutional ownership and acquisition activity. Further, we show that the relationship is stronger for firms with weak corporate governance suggesting that gender-diverse boards could act as a substitute mechanism for corporate governance that would be otherwise weak. The results are robust to alternative specifications of informativeness and gender diversity and to sensitivity tests controlling for time-invariant firm characteristics and alternative measures of stock price informativeness. We also find that gender diversity improves stock price informativeness through the mechanism of increased public disclosure in large firms and by encouraging private information collection in small firms.
I examine the relation between the presence of governance provisions and corporate innovation for a sample of firms between 1984 and 1997. I find a positive relation between four proxies for innovation and the broad Gompers, Ishii, and Metrick (2003) Index. However, in subsample analyses, I find that only those provisions that officers and directors actively adopt are positively related to innovation; coverage by state-level antitakeover legislation is typically unassociated or negatively associated with innovation. The evidence suggests that it is the visibility of officers and directors' actions rather than the potency of the takeover protection that best explains the observed pattern.
This paper examines the role of women helping women in corporate America. Using a merged panel of directors and executives for large US corporations between 1997 and 2009, we find a positive association between the female share of the board of directors in the previous year and the female share among current top executives. The relationship's timing suggests that causality runs from boards to managers and not the reverse. This pattern of women helping women at the highest levels of firm leadership highlights the continued importance of a demand-side "glass ceiling" in explaining the slow progress of women in business.
This paper reviews the literature on gender differences in economic experiments. In the three main sections, we identify robust differences in risk preferences, social (other-regarding) preferences, and competitive preferences. We also speculate on the source of these differences, as well as on their implications. Our hope is that this article will serve as a resource for those seeking to understand gender differences and to use as a starting point to illuminate the debate on gender-specific outcomes in the labor and goods markets.
In 2003, a new law required that 40% of Norwegian firms' directors be women--at the time only 9% of directors were women. We use the prequota cross-sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota. We find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in Tobin's Q over the following years, consistent with the idea that firms choose boards to maximize value. The quota led to younger and less experienced boards, increases in leverage and acquisitions, and deterioration in operating performance. Copyright 2012, Oxford University Press.
A survey of 138 college students reveals an undergraduate major has a greater influence on corporate social responsibility than business ethics. Business students are no less ethical than nonbusiness students. Females are more ethical and socially responsible than males. Age is negatively related to one's Machiavellian orientation and positively related to negative attitudes about corporate efforts at social responsibility. The results suggest a greater need to focus busines ethics instruction based on student characteristics.
Prior work suggests that if a firm shares a larger proportion of its growth opportunities with rivals, an inability to fully invest in these opportunities leads to predatory behavior on the part of rivals and losses in market share. We examine whether firms manage this predation risk. We find inter- and intra-industry evidence that the extent of the interdependence of a firm's investment opportunities with rivals is positively associated with its use of derivatives and the size of its cash holdings. Moreover, an analysis of investment behavior provides evidence that if this interdependence is high, the management of predation risk provides strategic benefits. Our results indicate that predation risk is an important determinant of corporate financial policy choices and investment behavior.
We describe how managers can entrench themselves by making manager-specific investments that make it costly for shareholders to replace them. By making manager-specific investments, managers can reduce the probability of being replaced extract higher wages and larger perquisites from shareholders, and obtain more latitude in determining corporate strategy. Our model of entrenchment has empirical implications that are consistent with the evidence on managerial behavior.
During the decade of the 1990s the number of women serving on corporate boards increased substantially. Over this decade, we show that the likelihood of a firm adding a woman to its board in a given year is negatively affected by the number of woman already on the board. The probability of adding a woman is materially increased when a female director departs the board. Adding a director, therefore, is clearly not gender neutral. Although we find that women tend to serve on better performing firms, we also document insignificant abnormal returns on the announcement of a woman added to the board. Rather than the demand for women directors being performance based, our results suggest corporations responding to either internal or external calls for diversity.
Using data from a national survey of nearly 2000 mutual fund investors, we investigate whether investor gender is related to risk taking as revealed in mutual fund investment decisions. Consonant with the received literature, we find that women exhibit less risk-taking than men in their most recent, largest, and riskiest mutual fund investment decisions. More importantly, we find that the impact of gender on risk taking is significantly weakened when investor knowledge of financial markets and investments is controlled in the regression equation. This result suggests that the greater level of risk aversion among women that is frequently documented in the literature can be substantially, but not completely, explained by knowledge disparities.
Industry concentration measures calculated with Compustat data, which cover only the public firms in an industry, are poor proxies for actual industry concentration. These measures have correlations of only 13% with the corresponding U.S. Census measures, which are based on all public and private firms in an industry. Also, only when U.S. Census measures are used is there evidence consistent with theoretical predictions that more-concentrated industries, which should be more oligopolistic, are populated by larger and fewer firms with higher price-cost margins. Further, the significant relations of Compustat-based industry concentration measures with the dependent variables of several important prior studies are not obtained when U.S. Census measures are used. One of the reasons for this occurrence is that Compustat-based measures proxy for industry decline. Overall, our results indicate that product markets research that uses Compustat-based industry concentration measures may lead to incorrect conclusions. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
Using options- and press-based proxies for CEO overconfidence (Malmendier and Tate 2005a, 2005b, 2008), we find that over the 1993-2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Overconfidence is not associated with lower sales, ROA, or Q.
This paper examines the empirical relationship between technological innovations, market share and stock market value. New
developments in the estimation of dynamic count data models are used to control for unobserved firm specific heterogeneity.
We find a robust and positive effect of market share on observable headcounts of innovations and patents although increased
product market competition in the industry tends to stimulate innovative activity. Furthermore, the impact of innovation on
market value is larger for firms with higher market shares. We argue that our results are consistent with models where high
market share firms have incentives to pre-emptively innovate.
Much of our understanding of corporations builds on the idea that managers, when they are not closely monitored, will pursue goals that are not in shareholders' interests. But what goals would managers pursue? This paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences. We use plant-level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws. We find that when managers are insulated from takeovers, worker wages (especially those of white-collar workers) rise. The destruction of old plants falls, but the creation of new plants also falls. Finally, overall productivity and profitability decline in response to these laws. Our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life.
This article empirically examines the patenting behavior of new biotechnology firms that have different litigation costs. I show that firms with high litigation costs are less likely to patent in subclasses with many other awards, particularly those of firms with low litigation costs. This pattern is consistent with the literature on costly litigation, which suggests that firms that have high litigation costs will take greater precautions to avoid litigation. These results are robust to a variety of control variables and modifications that seek to test alternative explanations. Copyright 1995 by the University of Chicago.
This article analyzes properties and implications of multiperiod managerial labor contracts under two alternative hypotheses: incentives, in which productivity depends on unobservable effort, and learning, in which ability is unknown and is revealed over time. Shared and conflicting implications of these competing models are developed in terms of experience-earnings profiles and the relation between compensation and performance. I empirically examine these theoretical results by using a longitudinal sample of 1,488 chief executive officers followed from 1974-1985. The data yield mixed evidence that generally supports the learning hypothesis over the incentive hypothesis.
It is often argued that competition in the product market reduces managerial slack. We formalize this idea. Suppose that there is a common component to firms' costs, i.e., as one firm's (total and marginal) costs fall, so do those of other firms. Then when costs fall, profit-maximizing firms expand. This reduces product prices and gives the manager of a nonprofit-maximizing firm less opportunity for discretionary behavior than if his firm's costs had fallen alone and produce prices had not changed. Hence average managerial slack is lower under competition than if there is a single nonprofit-maximizing monopolistic firm.
We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990--2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
The U.S. system of allocating investment capital is failing, putting American companies at a serious disadvantage and threatening the long-term growth of the nation's economy. The problem, says Michael Porter, goes beyond the usual formulation of the issue: accusations of "short-termism" by U.S. managers, ineffective corporate governance by directors, or a high cost of capital. The problem involves the external capital allocation system by which capital is provided to companies, as well as the system by which companies allocate capital internally. America's system is marked by fluid capital and a financial focus. Other countries--notably Japan and Germany--have systems with dedicated capital and a focus on corporate position. In global competition, where investment increasingly determines a company's capacity to upgrade and innovate, the U.S. system does not measure up. These conclusions come out of a two-year research project sponsored by the Harvard Business School and the Council on Competitiveness. Porter recommends five far-reaching reforms to make the U.S. system superior to Japan's and Germany's: 1. Improve the present macroeconomic environment. 2. Expand true ownership throughout the system so that directors, managers, employees, and even customers and suppliers hold positions as owners. 3. Align the goals of capital providers, corporations, directors, managers, employees, customers, suppliers, and society. 4. Improve the information used in decision making. 5. Foster more productive modes of interaction and influence among capital providers, corporations, and business units.