Article

Employee treatment and firm innovation*

Authors:
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

We identify firm innovation as a channel through which the treatment of employees affects firm value. Long‐term incentive theory supports positive effects of “good” employee treatment on innovation. Alternatively, entrenchment theory suggests such treatment will lead to complacency and shirking, hence deterring innovation. These opposing views merit investigation since human capital is increasingly essential to the growth and success of a firm. Using the KLD database and patent/citation data, we find a significant positive relationship between favorable employee treatment and the innovation quantity and quality of a firm. Furthermore, we find that the positive treatment of employees improves innovation focus—more innovation related to firms’ core business, leading to greater firm value via the increased economic value of patents. These findings, robust to endogeneity concerns, provide support for the long‐term incentive hypothesis, suggesting that well‐treated employees increase firm innovation. Thus, firm innovation represents a channel through which positive employee treatment enhances firm value. This article is protected by copyright. All rights reserved

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... Therefore, using CSR contracting to encourage futureoriented CSR engagement (Matějka et al., 2009;Flammer et al., 2019) presumably signals firms' substantive commitment to CSR engagement (Maas, 2018), which can help firms create a socially responsible image, thereby attracting and retaining talented employees, promoting their job satisfaction, and increasing their commitment to work (Sheridan, 1992;Turban and Greening, 1997). Such talented, satisfied, and dedicated employees tend to be more involved in innovation processes and to make more valuable contributions to successful innovation (Oldham and Cummings, 1996;Chen et al., 2016;Mao and Weathers, 2019). ...
... We conjecture that a greater level of employee innovation productivity is likely to be a key factor contributing to the positive relation between CSR contracting and innovation. In line with this view, research shows that positive employee treatment enhances firm innovation by promoting a learning climate and facilitating the exchange and absorption of knowledge and ideas (Mao and Weathers, 2019). ...
Article
Full-text available
Using a large sample of firms from 30 countries, we find that the integration of corporate social responsibility (CSR) criteria into executive compensation is associated with greater innovation output in countries around the world. We also find that this positive association is stronger in countries with weak stakeholder orientation, countries with weak legal environments, and countries without mandatory CSR reporting requirements. These findings suggest that CSR contracting can compensate for institutional voids and high stakeholder demand for CSR, and thereby foster firm innovation. The results of the channel analyses suggest that a greater level of employee innovation productivity, enhanced managerial risk-taking, and greater responsiveness of firms' R&D investment to their investment opportunities play a significant role in the association between CSR contracting and innovation. Overall, our study demonstrates in a global context the importance of linking executive compensation to nonfinancial criteria in addition to financial criteria, and it documents the heterogeneity in the effect of CSR contracting on firm innovation in different countries. Free Share Link (before October 12 2021) provided by Elsevier: https://authors.elsevier.com/a/1ddKR3JGUMs5N9.
... From the perspective of management, executives' salary, CEOs with doctor's degrees, overseas experience [29], and managers with science and engineering backgrounds can effectively promote firms' investment in innovation [25,26]. From the perspective of enterprise's stakeholders, employment stability and employee treatment that are positively associated with innovation output [30,31], institutional investors' site visits, increase in shareholding [32,33], and long-term incentives [34] will have a significant positive effect on innovation. Moreover, retail-investor attention increases corporate green innovation by improving information transparency, alleviating financing constraints, and deterring agency costs [35]. ...
Article
Full-text available
As the grassroots-party organizations of the Communist Party of China (CPC) are increasingly involved in the governance of private-owned enterprises (POEs), whether this new pattern promotes corporate innovation is still a research gap. Therefore, based on the data of 1357 POEs’ party-organization involvements and their patent applications from 2003 to 2017, this paper analyzes the impact of the party-organization involvements on corporate innovation by using the multiple regression model. The results include: (1) party-organization involvements including party organization activities and senior executives’ participation can significantly promote innovation, especially after 2012; (2) party-organization activities improve innovation by increasing research and development (R&D) investment and reducing operating risk, while the senior executives’ participation only influences on R&D investment; (3) the party-organization involvements have a stronger promotion on non-invention patent applications, especially for the utility-model-patent applications, than invention-patent applications; (4) the promotion is more pronounced for family businesses, technology-intensive and capital-intensive enterprises, as well as those located in the northern, Beijing-Tianjin-Hebei region and Yangtze River delta. After applying PSM sampling and difference-in-differences (DID) analyses, and substituting the dependent variables, the results remain robust. This paper provides Chinese evidence for party construction and corporate innovation, and also provides references about political connection and corporate innovation for other countries to some extent.
... However, less attention has been given to the effect of air pollution on firm strategy in terms of employee protection. Firms treating employees well can receive positive long-run stock returns [8] and reduce the probability of bankruptcy by operating with lower debt ratios [9]; additionally, employee-friendly policies also benefit corporate innovation, which in turn enhances the firm's value [10,11]. Given the fact that employees are the most important intangible assets [12] and human capital is the key factor for a firm's market power, we believe that studying the association between air pollution and employee protection can enrich our understanding of the economic consequences of air pollution and provide evidence for the determinants of employee protection. ...
Article
Full-text available
Air pollution is imposing substantial health and economic burdens on billions of people around the world. Although the impacts of air pollution on human health and economic growth have long been recognized, empirical evidence on whether and how air pollution affects firms’ employee protection remains unclear. Using a sample of publicly listed Chinese firms from 2010 to 2019, we show that air pollution can significantly increase firms’ employee protection. The results indicate that employee protection is an effective substitute for poor air quality in firm headquarters. Further analyses suggest that public pressure enhances the influence of air pollution on firms’ labor protection, while environmental regulation lessens the positive relationship between air pollution and employee treatment. Overall, we emphasize that air pollution is a significant non-economic determinant affecting firms’ human capital stock and employee treatment strategy. This study would be of particular interest to economists, managers, and regulators who are concerned about designing optimal environmental and welfare policies.
... Employee quality is also a key driver to increasing financial innovation performance for renewable energy investors. Effective financial products should be presented to attract the attention of renewable energy investors (Xu and Wang 2021;Mao and Weathers 2019), and more specific products should be created based on their demands. For this purpose, companies need qualified employees (Yüksel and Ubay 2021;Knyazeva 2019) to solve the problems of renewable energy investors . ...
Article
Full-text available
This study evaluates financial innovation priorities for renewable energy investors by generating a novel hybrid fuzzy decision-making model. First, SERVQUAL-based customer needs for financial innovation are weighted with decision-making trial and evaluation laboratory based on picture fuzzy sets. Second, the financial innovation priorities are ranked by technique for order preference by similarity to ideal solutions based on picture fuzzy rough sets. In this process, Theory of the solution of inventive problems-based technical characteristics for financial services, the process for innovative services, and competencies for financial innovation are considered using quality function deployment phases. In addition, the Vise Kriterijumska Optimizacija I Kompromisno Resenje method is also considered for an alternative ranking. Similarly, sensitivity analysis is also performed by considering five different cases. It is determined that the ranking priorities based on the proposed model are almost identical, demonstrating the proposed model’s validity and reliability. Assurance is the most crucial factor for the customer needs regarding the financial innovation priorities for renewable energy investors. Concerning the financial innovation priorities, the product is the essential priority for financial innovation; hence, it is recommended that companies engage qualified employees to effectively design the financial innovation for renewable energy investors. Additionally, necessary training should be given to the employees who currently work in the company, which can increase the renewable energy investors’ trust in the innovative financial products. Companies should mainly focus on the product to provide better financial innovation to attract renewable energy investors. An effectively designed financial innovation product can help solve the financing problem of renewable energy investors.
... The underlying mechanism through which employee-related CSR promotes firm innovation is stable teamwork. Mao and Weathers [88] observe that positive employee treatment is conducive to a corporate culture that tolerates failure, an engaging work environment, and a loyal, collaborative, and motivated research team, which enhances firm innovation [89,90]. Therefore, we argue that firms that conduct more employee-related CSR tend to have a stable creative research team, which benefits firm innovation. ...
Article
Full-text available
Despite the existing vast literature on corporate social responsibility (CSR), there is a lack of research on the influences of CSR categories (i.e., employees; suppliers, customers, and consumers; environment; and social welfare). The objective of this paper is to investigate the influences of distinct CSR categories on firm innovation from a resource-based theory perspective. Based on a sample of Chinese A-share listed firms from 2010 to 2017, we find that employee-, supplier, customer, and consumer-, and environment-related CSR promotes innovation, while society welfare-related CSR reduces firm innovation. We also examine the distinct mechanisms of distinct CSR categories to influence innovation. Our findings mainly contribute to the literature on the association between CSR and innovation by considering the different influences of distinct CSR categories.
... The existing literature suggests that determinants of innovations and associated financial benefits include firm size, employee skills, business cycle, and industry characteristics (Gali, 1999;Mao & Weathers, 2019;Ortiz & Fumás, 2019). ...
Article
Full-text available
The present study uses patent data for US public firms from 1986 through 2018 to investigate the impact of large corporate sector innovation activities on new business creation at the county level. Consistent with the knowledge spillover theory of entrepreneurship, the results show that large firms’ inventive activities exhibit a positive relationship with new business formation in the local manufacturing sector, and the positive effect is significant to small startup firms. Further tests reveal that when inventing firms are financially constrained, the positive effect of their innovations on local new business formation becomes more pronounced. This study suggests that financial constraints of large corporates have positive externalities to the real economy, highlighting the importance of financial capital resources to the regional entrepreneurship process.
... Moreover, it has a better comprehension of innovation funding circumstances that the traditional financial way of thinking does not serve [30]. Favorable employee conduct increases innovation focus on innovation projects which are connected to firms' main business [31]. ...
Article
Full-text available
The financial industry has developed rapidly with the emergence of financial technology companies. Moreover, the use of technology in the financial industry has developed rapidly. However, conventional financial companies face tough challenges in doing business. They have to adopt the technology to survive. The adoption of technology will increase the competitiveness of established financial companies against financial technology companies. The research aims to analyze the impact of technology on improving the work process of established financial companies. It examines the business model of established financial companies and financial technology companies. The work process is almost identical for all companies. The research applies a qualitative method. The chosen companies are multi-purpose financing for the purchase of two-wheeled and four-wheeled motorized vehicles. The total number of companies involved in the research is four companies. The result concludes that conventional consumer finance companies need to adopt technology into the work process to compete with financial technology companies. Technologies that can be used are Artificial Intelligence (AI), automation job allocation, chatbot, and face recognition. The work process is reviewed by digitizing, eliminating, and moving. Then, technology adoption will require a large investment. Hence, consumer finance companies can collaborate with technology companies, including financial technology companies.
... Employees are the most valuable asset and the most important innovator of firms (Mao & Weathers, 2019). Many corporations use CSR as an employee governance tool (Flammer & Luo, 2017). ...
Article
Full-text available
Purpose: In practice, an increasing number of economic entities have begun to consider strategic corporate social responsibility (CSR) as an opportunity to create a win-win situation for the organisation and the society. The existing literature has yet to soundly corroborate the role of strategic CSR in corporate innovation. This study examines the relationship between strategic CSR and innovation. Design/methodology/approach: The empirical regression models are estimated to analyse the data collected from 2817 firms yielding 18 845 firm–year observations from 2001 to 2014 in the United States. Findings/results: The findings indicate that firms with strategic CSR generate more and better innovation outputs. The positive effect is more pronounced when institutional ownership is lower, when firm size is larger, and when product market competition is more intense. In terms of economic consequences, firms with strategic CSR actually have higher commercial value and are less likely to suffer loss from failed innovation. Practical implications: To establish a sustainable relationship with stakeholders and realise the long-term development of business and society, enterprises should engage in strategic CSR in a planned manner based on their own resources and professional expertise. Originality/value: The study sheds light on a growing body of literature that investigates the real consequences of firms’ strategic CSR, and explains the growing recognition of the importance of strategic CSR.
... Numerous prior studies measure US firms' treatment of employees by using the employee relations ratings from the KLD database (Verwijmeren and Derwall, 2010;Bae et al., 2011;Mao and Weathers, 2019). The KLD database provides extensive information on ratings assigned to firms about employee treatment standards and is the most comprehensive database for evaluating a US firm's strengths and concerns regarding employee relations (Kang and Kim, 2020). ...
Article
Although the impacts of air pollution on individual health are well documented, it is unclear whether and how air pollution affects firm strategy on employee treatment. This study examines this issue in the context of China and presents strong evidence that air pollution significantly enhances employee treatment. To establish causality, we further instrument for air pollution using thermal inversions, introduce a regression discontinuity approach relying on the Huai River boundary, and a falsification test. Monetary compensation, safety security, and career training jointly determine our findings. Two plausible mechanisms are corporate brain drain and public attention. Our results are more pronounced for non-state-owned firms, and firms with less financial constraints, intensive R&D or competition, and increased job market opportunities. Overall, we highlight that air pollution is an important noneconomic factor driving firms' human capital and employee treatment strategy.
... Since bankruptcy occurs when a corporation is unable to meet its debt obligations, reducing the company's influence is an undeniable method of reducing the risk of financial distress. Furthermore, an abnormal level of employee well-being is linked to a lower debt-to-assets ratio (Mao & Weathers, 2019). ...
Article
Full-text available
Financial sustainability is a hot topic these days. Previous studies have explored the effects of socioeconomic characteristics on financial sustainability. However, this stream of research has paid little attention to psychological factors that may be related to financial sustainability of household. Therefore, the aim of the present study is to fill the research gap by examining the effects of financial attitudes, financial behavior and financial self-efficacy on financial sustainability. To meet the study objectives, data were collected from 284 employees working in Malaysian manufacturing sector. The collected data was then analyzed using the PLS-SEM approach. The results of this study show that financial attitudes, financial behavior and financial self-efficacy have a significant impact on the financial sustainability of employees affiliated with manufacturing sector of Malaysia.
... The evidence offered by the literature in this context is very variegated (Perry et al. 2009); only in some contexts, for example medical and education, is its effect positive (Andersen 2007;Davidson et al. 1992;Dowling and Richardson 1997;Shaw et al. 2003). It is worth noting that this is true in corporate contexts as well Mao and Weathers (2019). ...
Article
Full-text available
In this paper, the role of the monetary incentives in the employee performance is investigated in the context of Public Administration (PA). In particular, the distribution of monetary incentives among the employees based on the position held, is compared with a merit approach which tends to recognize and reward individual contributions. Starting from a questionnaire, the informal network, which ignores the vertical relation among supervisor and employees, is created and a Centrality Index, based on the employee connections, has been defined and used to proxy the performance of employees. The main goals of the paper are to understand if the two mechanisms of monetary incentive distribution affect the employee performance, to analyze the variables that influence the employee performance, and therefore to identify the role of monetary incentives. The linear regression methodology has been chosen as a tool of analysis. Results show that the distribution of monetary incentives according to merit criteria rewards the employee performance and has positive effects on the employee performance in the short term.
... At the same time, scholars have been committed to studying the influencing factors and driving forces of innovation. Many scholars have studied the perspectives of enterprise characteristics, such as corporate governance [2][3][4][5][6][7][8], human capital [9][10][11], and the nature of property [12,13]. The impact of customer relationships on innovation has also been studied from the perspective of laws and finance [14][15][16][17][18][19][20][21]. ...
Article
Full-text available
Technological innovation and stable customer relationships are both important factors for the sustainable development of enterprises. However, it remains unclear whether there is a relationship between stable customer relationships and technological innovation. In this work, we manually collected data regarding customer relationships and the innovation of manufacturing companies listed in the A-Share index in China from 2009 to 2016. Through empirical analysis, this work used a two-way fixed effect model and intermediary effect model tests to explore the impact of stable customer relationships on technological innovation. The empirical research found the following. (1) Stable customer relationships significantly promote the technological innovation of enterprises, and the empirical results are still valid after a variety of robust tests. The competitive advantage of enterprises forms a part of the intermediary role in the relationship above. (2) Comparing the samples of large-scale enterprises, state-owned enterprises, mature enterprises, and low-capital-intensive enterprises, the research found that stable customer relationships can significantly promote corporate technological innovation in small-scale enterprises, non-state-owned enterprises, young enterprises, and highly capital-intensive enterprises. This article enriches and deepens our understanding of the mechanism by which stable customer relationships affect enterprises’ technological innovation. At the same time, this research is helpful for better evaluating the impact of establishing a stable customer relationship on the sustainable competitive advantage of enterprises.
... A particular strand of literature has focused on examining the links between incentive systems within firms and employee innovation activities. Although large-scale quantitative evidence is sparse, it appears that performance-based reward systems have a positive influence on the creativity and "innovative behavior" of individual employees (De Jong and Den Hartog (2007); Ederer and Manso (2013); Gibbs, Neckermann, and Siemroth (2017)) and, in some cases, on the firm's overall innovation-related activities and outcomes (Leiblein and Madsen, 2009), including for example its patenting propensity (Chen et al., 2016) and quality (Mao and Weathers, 2019). In addition, human resource management and incentive systems play an important role in explaining performance in general (Bloom and Van Reenen, 2011;Bender et al., 2018). ...
Article
This paper explores the relationship between innovation and wages using Brazil’s employer–employee census (RAIS) and a novel measure of innovation derived from the share of technical and scientific occupations of workers. The results show a robust and positive wage premium associated with innovative firms. The decomposition of this innovation-related wage premium suggests that it is larger for workers in manufacturing, although also positive and significant for those in agriculture and services; and larger for large firms. More importantly, the paper explores the causality between innovation and wages. First, we find some empirical support for “self-selection” — firms that innovate already pay higher wages before becoming innovators. Second, we find strong evidence of wage increases associated with starting innovation activity, which are persistent for three years after firms start innovating. Innovation pays off also for workers.
Article
Against a background of rising labor costs and the need to build a harmonious labor–capital relationship in China, this paper focuses on non-pecuniary incentives for employees and discusses the impact of corporate social responsibility (CSR) towards employees on innovation performance. The empirical results show that CSR towards employees significantly promotes corporate innovation, and that this effect remains robust after accounting for alternative proxies and endogeneity issues. In addition, the positive effect of CSR towards employees on innovation is more significant for firms in high-tech industries, with high levels of R&D inputs and high valuation of employee collaboration. Further analysis indicates that CSR towards employees does not promote R&D investment, but does significantly improve innovation efficiency and the marginal output of R&D investment and reduces the turnover rate of management-level staff with production and R&D backgrounds, which is conducive to stability of the innovation team. In addition, this paper also finds that for companies with high R&D expenditures, CSR towards employees significantly eases the sensitivity between executive turnover and performance, which helps executives resist pressure arising from a decline in short-term performance. The findings of this paper have implications for improving labor–capital relations and enhancing firm innovation capabilities.
Article
Full-text available
The ultimate goal of business development is to achieve sustainable corporate growth and maximize shareholder wealth. Whether and how ESG disclosure affects sustainable growth needs to be further explored. Combining stakeholder theory and signaling theory, a panel data test based on 300 listed companies in Shanghai and Shenzhen in China finds that ESG disclosure can positively promote sustainable growth compared with companies that do not disclose ESG disclosure, and the higher the level of ESG disclosure, the greater the promotion effect on sustainable growth; and ESG disclosure further enhances sustainable growth by reducing financing constraints and enhancing human capital. In addition, the positive relationship between ESG disclosure and corporate sustainable growth is particularly pronounced for non- environmentally sensitive industries and when external environmental uncertainty intensifies. Our findings enrich the research related to ESG disclosure, provide motivation to motivate firms to consciously practice ESG disclosure from a sustainable growth perspective, and contribute to a more detailed understanding of the mechanisms of ESG disclosure and sustainable corporate growth.
Article
Using a unique quasi-natural event, i.e. gangdom and evil forces (hereafter, GEs) elimination in China, we investigate the relationship between the public governance proxied by GEs elimination and corporate innovation based on the data of Chinese listed firms from 2013 to 2021. The results show that the GEs elimination leads to a 0.39% increase in corporate innovation investment. Quantitatively, the increase is approximately equivalent to 4.42 million yuan for a firm of median innovation investment. Furthermore, we find that the GEs elimination increases corporate innovation through two possible channels: relieving financing constraints and intensifying market competition. In addition, we also reveal that the effects of GEs elimination on corporate innovation are stronger in firms located in a better marketization environment and a stronger Intellectual Property Rights (IPR) protection environment. Our main results pass a series of robustness tests and endogeneity issues.
Article
Using a sample of Chinese listed firms from 2007 to 2017, this study investigates the impact of trust on corporate innovation. We find that firms located in provinces with higher trust levels have both higher innovation inputs and outputs, indicating trust plays an important role in promoting corporate innovation. We further document that this association is more pronounced for firms with a higher degree of information asymmetry between boards and managers, and when CEOs have stronger incentives to engage in opportunistic behavior in innovation activities. In addition, we find that forced CEO turnover-performance sensitivity is lower and managers are less likely to underinvest in R&D in high trust areas, suggesting trust enhances corporate innovation through relationship alignment between shareholders and managers. We also find that trust promotes not only the quantity but also the quality of corporate innovation. Our study complements existing research that investigates factors encouraging corporate innovation and extends a growing body of literature that examines the impact of trust on corporate decisions.
Article
Workplace safety has become a key priority in China. However, the impact of workplace safety accidents on firm value remains unexplored. In this paper, using a dataset of 249 workplace safety accidents that occurred between 2007 and 2020, we find that workplace safety accidents result in a significant average drop of 2.5% (over $80 million) within 10 trading days. Firms with superior employee treatment will suffer lower financial market penalties, confirming the insurance effect of CSR activities. The moderating effect is also present in the overall CSR as well as in the stakeholder-related CSR dimensions. In addition, firms with workplace safety accidents will experience a greater decline in employee productivity and market valuation. Overall, the above findings emphasize the important role played by workplace safety and employee treatment for firm value and can provide policy implications for government, regulators, and corporate managers in emerging markets.
Article
Full-text available
Environmental protection and innovation performance are key issues that affect the sustainable development and value growth of cities. Using data of 272 prefecture-level cities during 2002–2016 and 2,169 listed companies, and the air ventilation coefficient and government environmental regulations, as the instrumental variables for PM2.5 concentrations, this paper applies two-stage OLS (2SLS) to investigate how air pollution affects China’s technological innovation and its realization mechanism. The results indicate that the rise in air pollution significantly inhibits the technological innovation level of regions as a whole as well as individual enterprises. When considering the spatial effect of the spread of PM2.5 concentrations, due to positive spillover effects on innovation activities, the spread of air pollution has negative impacts on technological innovation activities in surrounding cities. Human capital and labour costs are important channels through which air pollution influences China’s technological innovation. The implementation of pilot carbon trading policies can effectively reduce air pollution and then contribute to the achievement of the goals of the green growth strategy.
Article
Recent study focus on the government intervention to firm operation in emerging markets. Based on the hand collected unique data of official inspection to the Chinese listed firms during 2006–2016, this paper show that under the constraints of official employment aim, enterprises will adopt an employment strategy that reduces the educational threshold and increases employees. This paper firstly builds an employment aim function according to the labor model proposed by Helpman (2010). It proves that the function has restrained properties, which make up for the lack of proof of properties methods that were put forward by previous literatures. Furthermore, the empirical findings show that the Chinese officials visit the corporation frequently. Official visits can increase the number of employees, especially for employees with low educational level, decreasing average degree. This relation is much stronger in high employment aim province. The employment effect of government officials’ inspections is more pronounced when the average academic degree is below a certain threshold.
Article
The average workforce education near firms’ research centers facilitates firms’ matching with innovation talents and acquisition of knowledge. This study documents a positive association between the average education level in the metropolitan statistical areas (MSAs) where firms’ research centers are located and the quantity and quality of innovation outputs. The results are confirmed by controlling for various measures of MSA-level economic, population, and employment conditions, as well as research-center level analyses which control for firm-year fixed effects. We further find that local workforce education is more important for firms that are large, less labor-intensive, in non-high-tech industries and located in low education regions. The evidence highlights the importance of having access to well-educated local workforce for corporate innovation. JEL Classification: G30, J24, O31
Mixed-ownership reforms have been the mainstay of reforming China's state-owned enterprises (SOEs) in recent years. In relation to the broader context of the continuous slowdown in economic growth under the New Normal, the reshaping of the innovative capacity of SOEs has been widely considered to be of systemic importance. Yet, in the relevant literature, the effects of mixed-ownership reforms on innovations have remained unclear. This paper seeks to contribute to the literature by means of studying such effects for China's listed companies in the period 2007-2018, from the theoretical perspective of organizational controls in innovative firms. Our study finds that SOEs tend to be more innovative than non-SOEs, and increases in state shareholding do raise the innovative capacity of mixed-ownership enterprises. Further analyses reveal that, for mixed-ownership enterprises, the lower the level of state shareholding the more reliance of innovations on the capability of organizational controls in corporate governance. These findings offer useful policy lessons for China. Additionally, we discuss the contribution of our study to the broader literature at a conceptual level, with an emphasis on the novelty of highlighting the importance of organizational controls in the reform of SOEs.
Article
This paper investigates the impact of business strategy on firms’ trade credit policies. We find that firms following an innovation-oriented strategy (prospectors) offer significantly more trade credit to their customers than those following an efficiency-oriented strategy (defenders). Furthermore, by exploiting two exogenous shocks to the supplies of high-skill employees and bank credit, we find that prospectors curtail trade credit in response to the reduction of talent mobility following the adoption of Inevitable Disclosure Doctrine, whereas defenders significantly increase provisions of trade credit following the increase in bank credit supply due to the relaxation in interstate branching regulations. Additional evidence substantiates that prospectors increasing trade credit provisions enjoy higher sales generation efficiency and superior performance. Finally, our supply chain analysis documents that prospectors also receive significantly more trade credit from their suppliers. Collectively, our findings highlight that business strategy is an important yet intrinsic determinant of supply chain financing.
Article
This research aims to advance the literature by identifying the association between four advertising media vehicles (Internet, press, outdoor, television) and contemporaneous sales. Previous research highlights the influence of advertising on firm value but does not delve into the effects of advertising media vehicles. Employing primary data which details the advertising expenditures of 88 publicly traded companies over 11 years, we empirically show a positive association between television and outdoor advertising expenditures and contemporaneous sales. However, we do not find any significant results for press and Internet advertising. We investigate the moderating effect of the growth opportunities, industry sectors, and firm size. Our study offers important evidence that the contemporaneous relationship between sales and advertising expenditures varies by media vehicle. We discuss the implications of our findings for the matching principle, a principal concept in accrual accounting. This article is protected by copyright. All rights reserved.
Article
This paper examines the effect of local religiosity on employee treatment, proxied by workplace safety incidents. Using the establishment-level data compiling on the incidents of work-related injuries, we find that employees of the establishments in more religious counties get less injured than those in less religious counties. We further find that a reduction in occupational accidents is more evident for establishments in counties dominated by one religious denomination, strengthening our argument on community solidarity and homophily stemming from religious networks. Firms whose establishments are located in high religiosity counties are less likely to violate workplace conduct and more likely to take workplace safety measures. Moreover, firms with more work-related injuries exhibit poorer firm performance. Overall, our findings suggest that local religiosity has a value implication through human capital protection.
Article
This study examines the impact of employee treatment on family business innovation. Our empirical research shows that beneficial employee treatment can increase family business innovation input and output. Moreover, the empirical conclusions pass the robustness and endogeneity tests. An additional analysis shows that non-salary aspects of employee treatment can significantly increase the quantity and quality of innovation output; however, they have little to no impact on innovation input. Further, we find that the higher the levels of trust in society, trust in organizational decisions, and trust in co-workers are, the stronger is the role of employee treatment in family business innovation.
Article
This study explores the effect of CEO birth order on corporate innovation. Using hand-collected data, we find that firms led by firstborn CEOs are less innovative. This finding survives a number of robustness checks. When firms are more risky, non-state owned, or less financially constrained, the association between birth order and innovation is stronger, suggesting that the negative impact of firstborn CEOs is larger when their innovative personality is more demanding or influential. Meanwhile, firstborn CEOs have larger impact on corporate innovation when they are born in cities where Confucian culture are more influential or grow up in a low-income family, consistent with our argument that sibling competition makes firstborns less innovative. Overall, our results suggest that firstborn CEOs have negative effect on corporate innovation because they are less innovative intrinsically. This article is protected by copyright. All rights reserved
Article
Drawing on stakeholder and agency theories, we examine how employee friendly practices impact dividend payments in emerging countries. Using data from 862 firms and 6,071 firm-year observations from 17 emerging countries, we find that the employee friendly practices are negatively related to the dividend payments. This relationship is found to be stronger for government owned firms. We further examine the ‘agency problems’ and ‘future investment’ as possible channels through which employee friendly practices may lead firms to pay low dividends. We find the support for the future investment channel. Lastly, we examine the value effect of employee friendly treatment and find that employee friendly practices increase firm performance in emerging markets which lends support to the effectiveness of the investment channel.
Article
Strong-future-time reference (FTR) languages require speakers to grammatically mark future events, while weak-FTR languages do not. Using data from 34 countries, we find that firms in countries where strong-FTR languages are spoken have fewer patent counts and patent citations than those in countries where weak-FTR languages are spoken. Further evidence shows that strong-FTR languages affect inventors’ perceptions and beliefs about future rewards from innovation. Moreover, due to interactions between people speaking different languages, globalization attenuates the negative impact of language FTR on innovation. To further support these findings, we provide evidence from a single country with a multilingual environment to control for omitted country-level characteristics. Our study emphasizes the impact of language on corporate innovation and sheds light on the importance of informal institutions in economic outcomes. This article is protected by copyright. All rights reserved
Article
Our paper examines the relationship between industry tournament incentives for CEOs and corporate innovation. We find that the external pay gap is positively associated with subsequent innovation output and its economic value. Our results are robust to using different industry classifications, alternative measures of industry tournament incentives and innovation, and various controls for corporate governance, business strategy, and CEO attributes. We employ a quasi-natural experiment and an instrumental-variable approach to mitigate endogeneity concerns. We also find evidence of a positive and significant relationship between industry tournament incentives and idiosyncratic risk. Overall, the evidence is consistent with our contention that aspirant CEOs undertake innovation projects which can generate uncertain but potentially rewarding outcomes that increase the likelihood of the aspirant standing out and winning the tournament or extracting the tournament-induced benefits internally. This article is protected by copyright. All rights reserved
Article
We synthesise the empirical studies on innovation in the accounting, finance, and corporate governance disciplines using Bushman and Smith’s corporate transparency framework as our theoretical lens. The review presents competing findings on the association between financial reporting and innovation. Most of the reviewed studies fail to address the critical question of how the financial reporting system affects the interactions among financial development, corporate governance and innovation. We suggest future research, ranging from enriching the theoretical perspectives to incorporating the future of innovation research in the COVID‐19 environment.
Article
This study examines the relation between corporate social responsibility (CSR) and firm innovation. We replicate and extend the work of Mao and Weathers (2019), who investigate employee treatment and innovation, and find that CSR has an incremental effect on innovation outcomes (measured as citation-weighted patent counts) beyond the documented effect of employee treatment. The CSR effect mostly comes from CSR strengths rather than concerns. This effect remains robust after we address potential endogeneity concerns using three identification strategies. We also find that the CSR effect exists only in situations of more effective board monitoring, stronger CEO leadership, and greater employee human capital, and is greater in complex firms. Our overall evidence is consistent with the argument that CSR enhances technological innovation as it helps firms develop internal resources and capabilities related to creative corporate culture, long-term orientation, and employee knowledge and skills that are critical and conducive to innovation success. JEL Classifications: M14; O31.
Article
We investigate the impact of employee treatment on labor investment efficiency. We provide evidence that employee-friendly treatment is significantly associated with lower deviations of labor investment from the level justified by economic fundamentals, i.e., higher labor investment efficiency. The effect of employee treatment on labor investment efficiency is stronger for firms that are human-capital-intensive, with more skilled labor and knowledge capital, and those that face higher product market competition. Using the 2008–2009 financial crisis as an external shock and applying the difference-in-difference method, we also show that employee-friendly firms have higher labor investment efficiency in the post-financial crisis period, but experience more inefficient labor investments during the crisis. Our results are robust to placebo tests, selection bias, propensity score matching, alternative explanations, alternative proxies for both employee treatment and labor investment efficiency as well as the adjustment for using residuals as dependent variables, additional control variables, and various approaches in addressing endogeneity issues.
Article
This study is aimed at examining the mediating effect of meaningful work (MFW) between human resource practices (HRP) i.e. staffing, training, participation, performance-based evaluation, and reward with innovative work behavior (IWB) of Indian small and medium-sized enterprise (SME) employees. This is a cross-sectional study with data of 199 respondents collected from the Indian SME sector. The mediation path was analyzed using multiple hierarchical regression analysis and processes. Results of the study indicate that human resource practices, i.e. staffing, training, and participatory decision making, are positively related to IWB; MFW mediates the relationships between these human resource practices and IWB. Interestingly, performance-based evaluation and reward are not found to be related positively to IWB in SMEs. The study adds value to SME literature on how SMEs may promote innovation amongst their employees. In addition, the findings of the present study add to human resource management (HRM) literature regarding practices in Indian SMEs.
Article
This study investigates corporate innovation from the perspective of a firm's employee-related corporate social responsibility (CSR) in China. We find that more employee-related CSR generates more innovation success. The results suggest that a firm's incentive to offer better employee-related CSR is an important determinant of its innovation. The positive effect is more pronounced when employees' input into innovation is more important, and when free-riding among employees is stronger. Additional tests indicate that more employee-related CSR spurs innovation through employee stability and innovation efficiency. Our results hold up to a variety of model specifications and endogeneity issues.
This paper studies how staying private longer plays a role in the innovation of VC-backed IPO companies and the outcomes of VC investments. I find that without public short-termism of targeting short-term earnings, companies staying private longer can enhance their innovation productivity through VC support prior to IPOs. The effects of staying private longer on post-IPO innovation activities for VC-backed companies depend on their pre-IPO innovation performance. Based on superior innovation productivity before IPOs, all more innovative companies encounter pressure from the stock market and thus have similar performance in post-IPO innovation, which is unrelated to how long they stay private. In contrast, depending on poor innovation productivity preceding IPOs of less innovative companies, going public earlier has a favorable effect on the post-IPO quantity and quality of innovation outputs. I provide new evidence that rather than realizing benefits from rapidly pursuing IPOs for portfolio companies, VCs are motivated to back their portfolio companies to stay private longer due to the upside potential of backing more innovative companies, while VCs could face the risk of losing reputation by backing less innovative companies.
Article
A large amount of literature has addressed the significant effects of some internal and external factors on corporate innovation performance. However, no research in the field of production economics focuses on the plausible impact of employee welfare on innovation performance of manufacturing corporations. Using a large sample data from Chinese listed manufacturing corporations over the period of 2010–2017, this study investigates whether and how employee welfare affects corporate innovation performance. We find that manufacturing corporations with higher employee welfare have better innovation performances measured by three categories of patent applications and this positive relationship is mainly reflected in the level of quality of innovation but not in the quantity of it. Then, various robustness checks further show that our results are not biased by alternative measures of innovation performance or employee welfare through different regression methods. In addition, the channel tests show that the positive impacts of employee welfare on innovation performances in China's manufacturing corporations are mainly achieved by retaining outstanding employees, attracting positive media reports and increasing inventor (R&D) efficiency. Finally, we test the validity of three impact channels by using mediating effect analysis and further confirm our conclusions.
Article
We investigate whether powerful chief executive officers (CEOs) influence the conditions of their cash bonus contracts. Specifically, we examine (i) the association between CEO power and the proportion of ex ante cash bonus to base salary (bonus ratio), (ii) the association between CEO power and the relative use of non‐financial to financial targets in cash bonus contracts, and (iii) the performance consequences of incorporating non‐financial targets in cash bonus contracts. Results show that powerful CEOs are associated with greater ex ante bonus ratios and higher proportions of non‐financial performance targets compared to less powerful CEOs. Furthermore, the use of quantitative and CSR‐related non‐financial performance targets is positively associated with subsequent firm performance, and the use of undefined non‐financial performance targets is associated with negative subsequent firm performance. These results are robust to alternative econometric specifications and variable definitions. This article is protected by copyright. All rights reserved
Article
Full-text available
This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, institutional ownership is positively associated with E&S performance with additional tests suggesting this relation is causal. Institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S improvements. In cross section, investors increase firms’ E&S performance when they come from countries with a strong community belief in the importance of E&S issues, but not otherwise. As such, these institutional investors transplant their social norms regarding E&S issues around the world.
Article
Full-text available
We study which dimensions of corporate culture are related to a firm's performance and why. We find that proclaimed values appear irrelevant. Yet, when employees perceive top managers as trustworthy and ethical, a firm's performance is stronger. We then study how different governance structures impact the ability to sustain integrity as a corporate value. We find that publicly traded firms are less able to sustain it. Traditional measures of corporate governance do not seem to have much of an impact.
Article
Full-text available
Resource-based theorists argue that human assets can be a source of sustainable advantage because tacit knowledge and social complexity are hard to imitate. However, these desirable attributes cause dilemmas that may prevent firms from generating an advantage. This article develops a framework for analyzing and coping with these challenges. Although the problem arises from the strategy literature, the solutions are drawn from the organizational behavior, human resource management, human capital, and professions literatures. Finally, I examine implications for how insights from these diverse literatures can be integrated to guide future strategy research.
Article
Full-text available
Resource-based theorists argue that human assets can be a source of sustainable advantage because tacit knowledge and social complexity are hard to imitate. However, these desirable attributes cause dilemmas that may prevent firms from generating an advantage. This article develops a framework for analyzing and coping with these challenges. Although the problem arises from the strategy literature, the solutions are drawn from the organizational behavior, human resource management, human capital, and professions literatures. Finally, I examine implications for how insights from these diverse literatures can be integrated to guide future strategy research.
Article
Full-text available
We examine whether tolerance for failure spurs corporate innovation based on a sample of venture capital (VC) backed IPO firms. We develop a novel measure of VC investors’ failure tolerance by examining their tendency to continue investing in a venture conditional on the venture not meeting milestones. We find that IPO firms backed by more failure-tolerant VC investors are significantly more innovative. A rich set of empirical tests shows that this result is not driven by the endogenous matching between failure-tolerant VCs and startups with high ex-ante innovation potentials. Further, we find that the marginal impact of VC failure tolerance on startup innovation varies significantly in the cross section. Being financed by a failure-tolerant VC is much more important for ventures that are subject to high failure risk. Finally, we examine the determinants of the cross-sectional heterogeneity in VC failure tolerance. We find that both capital constraints and career concerns can negatively distort VC failure tolerance. We also show that younger and less experienced VCs are more exposed to these distortions, making them less failure tolerant than more established VCs.
Article
Full-text available
Most research linking compensation to strategy relies on agency theory economics and focuses on executive pay. We instead focus on the strategic compensation of non-executive employees, arguing that while agency theory provides a useful framework for analyzing compensation, it fails to consider several psychological factors that increase costs from performance-based pay. We examine how psychological costs from social comparison and overconfidence reduce the efficacy of individual performance-based compensation, building a theoretical framework predicting more prominent use of team-based, seniority-based, and flatter compensation. We argue that compensation is strategic not only in motivating and attracting the worker being compensated, but also in its impact on peer workers and the firm’s complementary activities. The paper discusses empirical implications and possible theoretical extensions of the proposed integrated theory.
Article
Full-text available
As corporate managers interact with non-shareholder stakeholders, potential tradeoffs emerge and questions arise as to how these interactions impact shareholder value. We argue that this shareholder–stakeholder debate is an important issue within the overall corporate governance and corporate policy domain and examine one such stakeholder group – employees – by studying labor-friendly corporate practices. We find that announcements of labor-friendly policies are associated with positive abnormal stock returns. Labor-friendly firms also outperform otherwise similar firms, both in terms of long-run stock market returns and operating results. In addition, we find that the probability and benefits of labor-friendliness increase with the demand for highly skilled labor. Our analysis of excess executive compensation suggests that top management derives no pecuniary benefits from labor-friendly practices. We interpret our results as consistent with a genuine concern for employees translating into higher productivity and profitability, which in turn facilitate value creation. It appears that the benefits of labor-friendly practices significantly outweigh the costs and that what is good for employees is good for shareholders. Keywordscorporate social responsibility–employee stakeholders–stakeholder theory–agency theory
Article
Full-text available
Equity ownership gives labor both a fractional stake in a firm's residual cash flows and a voice in corporate governance. Relative to other firms, labor-controlled publicly traded firms deviate more from value maximization, invest less in long-term assets, take fewer risks, grow more slowly, create fewer new jobs, and exhibit lower labor and total factor productivity. Therefore, we propose that labor uses its corporate governance voice to maximize the combined value of its contractual and residual claims, and that this often pushes corporate policies away from, rather than toward, shareholder value maximization.
Article
Full-text available
In this paper, the authors show that Tobin's q and firm diversification are negatively related throughout the 1980s. This negative relation holds for different diversification measures and when they control for other known determinants of q. Further, diversified firms have lower q's than comparable portfolios of pure-play firms. Firms that choose to diversify are poor performers relative to firms that do not but there is only weak evidence that they have lower q's than the average firm in their industry. The authors find no evidence supportive of the view that diversification provides firms with a valuable intangible asset. Copyright 1994 by University of Chicago Press.
Article
Full-text available
This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection as well as empirical evidence on the effects of patent rights. Then, the second part considers the international aspects of IPR protection. In summary, this paper draws the following conclusions from the literature. Firstly, different patent policy instruments have different effects on R&D and growth. Secondly, there is empirical evidence supporting a positive relationship between IPR protection and innovation, but the evidence is stronger for developed countries than for developing countries. Thirdly, the optimal level of IPR protection should tradeoff the social benefits of enhanced innovation against the social costs of multiple distortions and income inequality. Finally, in an open economy, achieving the globally optimal level of protection requires an international coordination (rather than the harmonization) of IPR protection.
Article
Full-text available
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
Article
Using panel data on top management characteristics and a management quality factor constructed using common factor analysis on individual management quality measures, we analyze the relation between top firm management quality and corporate innovation input and output. We show that top management quality is an important determinant of corporate innovation, with individual aspects of management quality affecting innovation in younger and older firms differently. Further, firms with higher top management quality engage in more risky (“explorative”) innovation strategies. Finally, hiring more and higher-quality inventors is an important channel through which firms with higher management quality achieve greater innovation output.
Article
We examine the effect of banks’ interventions on corporate innovation and firms’ value via the lens of debt covenant violations. Banks’ interventions have a significantly negative effect on the quantity of innovations but no significant effect on their quality. The reduction in quantity is concentrated in innovations that are unrelated to the violating firm’s core business, which leads to a more-focused scope of investment in innovation and ultimately an increase in the firm’s value. Human capital redeployment appears to be a plausible underlying mechanism through which banks’ interventions refocus the scope of innovation and enhance a firm’s value. Our paper sheds new light on the real effect of bank financing.
Article
We propose a new measure of the economic importance of each innovation. Our measure uses newly collected data on patents issued to U.S. firms in the 1926 to 2010 period, combined with the stock market response to news about patents. Our patent-level estimates of private economic value are positively related to the scientific value of these patents, as measured by the number of citations the patent receives in the future. Our new measure is associated with substantial growth, reallocation, and creative destruction, consistent with the predictions of Schumpeterian growth models. Aggregating our measure suggests that technological innovation accounts for significant medium-run fluctuations in aggregate economic growth and TFP. Our measure contains additional information relative to citation-weighted patent counts; the relation between our measure and firm growth is considerably stronger. Importantly, the degree of creative destruction that is associated with our measure is higher than previous estimates, confirming that it is a useful proxy for the private valuation of patents. © The Author(s) 2016. Published by Oxford University Press, on behalf of the President and Fellows of Harvard College.
Article
Approaching the institutional environment through its regulative component, we distinguish between shareholder-oriented and stakeholder-oriented countries. Identifying first this classification with the distinction between common law versus civil law countries and using a large sample of 5,716 firm-year observations that represents 1,169 individual firms in 25 countries between 2001 and 2011, we show that Corporate Social Responsibility (CSR) significantly reduces firms’ idiosyncratic risk in civil law countries but not in common law countries. Using then a more direct classification based on shareholder and employee protection scores, our findings suggest that CSR negatively affects firms’ idiosyncratic and systematic risks only in less shareholder-oriented and more stakeholder-oriented countries, respectively. These findings are similar in the different components of CSR with two notable exceptions: A high score in corporate governance reduces firm risk only in common law countries, and community involvement increases idiosyncratic risk in more shareholder-oriented and less stakeholder-oriented countries, respectively. Taken together, our results strongly support the view that the relationship between CSR and financial risk is moderated by the institutional context of the firm. This article is protected by copyright. All rights reserved
Article
We examine the impact of corporate innovation strategy on analyst following and forecasting performance, as well as the associated economic consequences. Using a sample of U.S. firms from 1992–2012, we find that firms pursuing an exploration-oriented innovation strategy (as opposed to an exploitation-oriented innovation strategy) are associated with lower analyst coverage, higher forecast error and dispersion. The effect is less pronounced for firms with greater disclosure of innovation activities, and for firms followed by analysts with more firm-specific experience. We also examine how innovation strategy affects the perceived credibility of analyst forecasts and find that investors appear to be less responsive to forecast revisions issued for exploratory firms. Such firms also incur a higher level of cash holdings, greater internal financing, and lower dividend ratio. Findings of this paper advance our understanding of how a public company's choice of innovation strategy affects its performance in the capital markets as well as the associated economic consequences. This article is protected by copyright. All rights reserved
Article
In this paper, using a generalised valuation framework inspired by Ohlson (1995), we show that corporate social performance (CSP) is value relevant and that, in particular, it appears to be associated with a higher coefficient on earnings. This could be attributable to either a lower cost of equity for these firms, or greater earnings persistence. We show that, once industry membership is controlled for, any cost of capital effect is minimal. Regression tests based on realised earnings confirm that the valuation effect is attributable mainly to greater earnings persistence in firms with higher levels of CSP. These outcomes are consistent with higher CSP conferring a competitive advantage on firms. This article is protected by copyright. All rights reserved
Article
We argue that the extent to which a firm faces takeover threats affects its knowledge structure. In particular, takeover threats may lead to managers’ reluctance to adopt a strategy toward firm-specific knowledge accumulation, because implementing this strategy requires them to acquire specialized skills, which are at risk under takeover threats. Conversely, takeover protection leads to an increase in firm-specific knowledge. Further, the relationship between takeover protection and firm-specific knowledge is positively moderated by managerial ownership, which helps align managerial interests with those of shareholders. But the relationship is negatively moderated by managerial tenure, as long-tenured managers have already committed to their firms. Using a differences-in-differences method with Delaware antitakeover rulings in mid-1990s as an exogenous shock, we found results supporting these arguments.Managerial SummaryWe examined how changes in the Delaware antitakeover rulings in mid-1990s affected the knowledge structure of firms incorporated in Delaware. We reasoned that with a greater level of takeover protection, top managers of those firms incorporated in Delaware felt higher job security, thus providing them stronger incentives to make strategic decisions towards the development of firm-specific knowledge and to make corresponding human capital investments in specialized skills. Empirically, firms incorporated in Delaware were found to have an increase in the level of firm-specific knowledge in their knowledge structure after mid-1990s. Furthermore, our analysis suggests that the role of takeover protection on top manager incentives is particularly salient when the managers are awarded with more company shares and when the managers have shorter organizational tenure.
Article
Research summary: We argue that the extent to which a firm faces takeover threats affects its knowledge structure. In particular, takeover threats may lead to managers' reluctance to adopt a strategy toward firm-specific knowledge accumulation because implementing this strategy requires them to acquire specialized skills, which are at risk under takeover threats. Conversely, takeover protection leads to an increase in firm-specific knowledge. Further, the relationship between takeover protection and firm-specific knowledge is positively moderated by managerial ownership, which helps align managerial interests with those of shareholders. But the relationship is negatively moderated by managerial tenure, as long-tenured managers have already committed to their firms. Using a differences-in-differences method with Delaware antitakeover rulings in the mid-1990s as an exogenous shock, we found results supporting these arguments. Managerial summary: We examined how changes in the Delaware antitakeover rulings in mid-1990s affected the knowledge structure of firms incorporated in Delaware. We reasoned that with a greater level of takeover protection, top managers of those firms incorporated in Delaware felt higher job security, thus providing them stronger incentives to make strategic decisions toward the development of firm-specific knowledge and to make corresponding human capital investments in specialized skills. Empirically, firms incorporated in Delaware were found to have an increase in the level of firm-specific knowledge in their knowledge structure after the mid-1990s. Furthermore, our analysis suggests that the role of takeover protection on top manager incentives is particularly salient when the managers are awarded with more company shares and when the managers have shorter organizational tenure.
Article
More than 4 decades of research and 9 meta-analyses have focused on the undermining effect: namely, the debate over whether the provision of extrinsic incentives erodes intrinsic motivation. This review and meta-analysis builds on such previous reviews by focusing on the interrelationship among intrinsic motivation, extrinsic incentives, and performance, with reference to 2 moderators: performance type (quality vs. quantity) and incentive contingency (directly performance-salient vs. indirectly performance-salient), which have not been systematically reviewed to date. Based on random-effects meta-analytic methods, findings from school, work, and physical domains (k = 183, N = 212,468) indicate that intrinsic motivation is a medium to strong predictor of performance (ρ = .21-45). The importance of intrinsic motivation to performance remained in place whether incentives were presented. In addition, incentive salience influenced the predictive validity of intrinsic motivation for performance: In a "crowding out" fashion, intrinsic motivation was less important to performance when incentives were directly tied to performance and was more important when incentives were indirectly tied to performance. Considered simultaneously through meta-analytic regression, intrinsic motivation predicted more unique variance in quality of performance, whereas incentives were a better predictor of quantity of performance. With respect to performance, incentives and intrinsic motivation are not necessarily antagonistic and are best considered simultaneously. Future research should consider using nonperformance criteria (e.g., well-being, job satisfaction) as well as applying the percent-of-maximum-possible (POMP) method in meta-analyses. (PsycINFO Database Record (c) 2014 APA, all rights reserved).
Article
Greater corporate focus is consistent with shareholder wealth maximization. Diseconomies of scope in the 1980s are confirmed by a trend towards focus or specialization, a positive relation between stock returns and focus increases, and the failure of diversified firms to exploit financial economies of scope (coinsurance of debt or reliance on internal capital markets). Large focused firms were less likely to be subject to hostile takeover attempts than were other firms, but diversified firms were distinguished in the 1980s mostly by being relatively active participants, as both buyers and sellers, in the market for corporate control.
Article
Using a large sample of mergers in the U.S., we examine whether corporate social responsibility (CSR) creates value for acquiring firms’ shareholders. We find that compared to low CSR acquirers, high CSR acquirers realize higher merger announcement returns, higher announcement returns on the value-weighted portfolio of the acquirer and the target, and larger increases in post-merger long-term operating performance. They also realize positive long-term stock returns, suggesting that the market does not fully value the benefits of CSR immediately. In addition, we find that mergers by high CSR acquirers take less time to complete and are less likely to fail than mergers by low CSR acquirers. These results suggest that acquirers’ social performance is an important determinant of merger performance and the probability of its completion, and support the stakeholder value maximization view of stakeholder theory.
Article
This paper investigates the trading motives around Corporate Social Responsibility (CSR) rating announcements. Focusing on the European market, we use Vigeo ratings, which are disclosed almost every month, while others agencies like KLD rate whole firms annually. This periodicity enables us to use an event study methodology to measure abnormal trading volume associated with rating announcements. Controlling for endogeneity and causality this paper clearly shows that before the announcement trading volume drops sharply while it increases afterwards, both effects compensating. The willingness to trade depends on trading costs, prior private information and the information content of the announcement. Our results show no effect of aggregated scores (or their revision). We evidence that Business Behavior, Human Resources and some precise topics (as Executive Remuneration or Societal Behavior) influence significantly investors’ trades. Beyond financial information, CSR rating agencies produce valuable information used by investors. These results suggest that a broader dissemination of CSR rating should improve market quality.
Article
Globalization is an ongoing process that is bearing witness to unprecedented change. The industrial age rewarded organizations that cloistered scarce information, creating closed secretive organizations. Digitization of information is creating an entirely new era based on information abundance. This information abundance allows workers around the world to connect to digitized resources and compete globally for work. A premium is now being paid to organizations that create innovative solutions from within this information-abundant ecosystem. This study identifies highly read books and highly cited research articles on innovation and conducts a cross-case inductive analysis on the key terms related to teamwork.The dominant emergent theme that an innovative culture is essential provides important insight for human resource development professionals as they build teams in an effort to compete globally for innovative work.
Article
This paper argues that changes in workplace organisation, including re-engineering, teams, incentive pay and employee voice, have been a significant component of the turnaround in productivity growth in the US during the 1990s. Our work goes beyond measuring the impact of computers on productivity and finds that these types of workplace innovation appear to explain a large part of the movement in multi-factor productivity in the US over the period 1993–6. These results suggest additional dimensions to the recent productivity growth in the US that may well have implications for productivity growth potential in Europe.
Article
This study examines how inclusive leadership (manifested by openness, accessibility, and availability of a leader) fosters employee creativity in the workplace. Using a sample of 150 employees, we investigated the relationship between inclusive leadership (measured at Time 1), psychological safety, and employee involvement in creative work tasks (measured at Time 2). The results of structural equation modeling (SEM) analysis indicate that inclusive leadership is positively related to psychological safety, which, in turn, engenders employee involvement in creative work.
Article
We examine how shocks to the supply of credit impact corporate investment and financial policies using the collapse of Drexel Burnham Lambert, Inc., the passage of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), and regulatory changes in the insurance industry as an exogenous contraction in the supply of below-investment-grade credit after 1989. A difference-in-differences empirical strategy reveals that substitution to bank debt and alternative sources of capital (e.g., equity) was extremely limited and, as a result, net investment decreased almost one-for-one with the contraction in net security issuing activity. Despite this sharp change in behavior, corporate leverage ratios remained relatively stable as a result of declining equity values. Our findings suggest that capital markets can exhibit distinct segmentation, which in turn can amplify the effect of fluctuations in the supply of capital on corporate behavior.
Article
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.
Article
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.
Article
We show that wrongful discharge laws—laws that protect employees against unjust dismissal—spur innovation and new firm creation. Wrongful discharge laws, particularly those that prohibit employers from acting in bad faith ex post, limit employers' ability to hold up innovating employees after the innovation is successful. By reducing the possibility of holdup, these laws enhance employees'innovative efforts and encourage firms to invest in risky but potentially mould-breaking projects. We develop a model and provide supporting empirical evidence of this effect using the staggered adoption of wrongful discharge laws across U.S. states.
Article
We examine how financial market development affects technological innovation. Using a large data set that includes 32 developed and emerging countries and a fixed effects identification strategy, we identify economic mechanisms through which the development of equity markets and credit markets affects technological innovation. We show that industries that are more dependent on external finance and that are more high-tech intensive exhibit a disproportionally higher innovation level in countries with better developed equity markets. However, the development of credit markets appears to discourage innovation in industries with these characteristics. Our paper provides new insights into the real effects of financial market development on the economy.
Article
Motivating innovation is important in many incentive problems. This paper shows that the optimal innovation-motivating incentive scheme exhibits substantial tolerance (or even reward) for early failure and reward for long-term success. Moreover, commitment to a long-term compensation plan, job security, and timely feedback on performance are essential to motivate innovation. In the context of managerial compensation, the optimal innovation-motivating incentive scheme can be implemented via a combination of stock options with long vesting periods, option repricing, golden parachutes, and managerial entrenchment.
Article
We study the effects of noncompetition agreements by analyzing time-series and cross-sectional variation in the enforceability of these contracts across US states. We find that tougher noncompetition enforcement promotes executive stability. Increased enforceability also results in reduced executive compensation and shifts its form toward greater use of salary. We further show that stricter enforcement reduces capital expenditures per employee. These results are consistent with a model in which enforceable noncompetition contracts encourage firms to invest in their managers' human capital. On the other hand, our findings suggest that these contracts also discourage managers from investing in their own human capital and that this second effect is empirically dominant. The Author 2009. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
Article
We test a prediction from the corporate focus literature that cross-industry spinoff distributions, where the continuing and spunoff units belong to different two-digit Standard Industry Classification codes, create more value than own-industry spinoffs. Our results indicate significant value creation around the announcement of cross-industry spinoffs only. We then provide evidence on whether the value creation comes from operating performance improvements, or bonding benefits, or both, where bonding refers to a pre-commitment by managers to avoid cross-subsidizing relatively poor performing units within the firm. We find a significant improvement in operating performance for cross-industry spinoffs, and none for own-industry cases. We do not find strong evidence of bonding to explain spinoff-related value creation. Further, the operating performance improvement is associated with the continuing rather than the spunoff entity, consistent with the hypothesis that spinoffs create value by removing unrelated businesses and allowing managers to focus attention on the core operations they are best suited to manage.
Article
We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of US firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.
Article
This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the “100 Best Companies to Work For in America” earned an annual four-factor alpha of 3.5% from 1984 to 2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies, and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing (SRI) screens may improve investment returns.
Article
We investigate the stakeholder theory of capital structure from the perspective of a firm’s relations with its employees. We find that firms that treat their employees fairly (as measured by high employee‐friendly ratings) maintain low debt ratios. This result is robust to a variety of model specifications and endogeneity issues. The negative relation between leverage and a firm’s ability to treat employees fairly is also evident when we measure its ability by whether it is included in the Fortune magazine list, “100 Best Companies to Work For.” These results suggest that a firm’s incentive or ability to offer fair employee treatment is an important determinant of its financing policy.
Article
We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade-off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage. Copyright (c) 2010 the American Finance Association.
Article
Employees of liquidating firms are likely to lose income and non-pecuniary benefits of working for the firm, which makes bankruptcy costly for employees. This paper examines whether firms take these costs into account when deciding on the optimal amount of leverage. We find that firms with leading track records in employee well-being significantly reduce the probability of bankruptcy by operating with lower debt ratios. Moreover, we observe that firms with better employee track records have better credit ratings, even when we control for differences in firm leverage.
Article
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.
Article
No. This paper investigates the relationship between financing constraints and investment-cash flow sensitivities by analyzing the firms identified by Fazzari, Hubbard, and Petersen as having unusually high investment-cash flow sensitivities. We find that firms that appear less financially constrained exhibit significantly greater sensitivities than firms that appear more financially constrained. We find this pattern for the entire sample period, subperiods, and individual years. These results (and simple theoretical arguments) suggest that higher sensitivities cannot be interpreted as evidence that firms are more financially constrained. These findings call into question the interpretation of most previous research that uses this methodology.
Article
The role of imperfect information in a principal-agent relationship subject to moral hazard is considered. A necessary and sufficient condition for imperfect information to improve on contracts based on the payoff alone is derived, and a characterization of the optimal use of such information is given.
Article
Can stringent labor laws be efficient? Possibly, if they provide firms with a commitment device to not punish short-run failures and thereby incentivize the pursuit of value-maximizing innovative activities. In this paper, we provide empirical evidence that strong labor laws indeed appear to have an ex ante positive incentive effect by encouraging the innovative pursuits of firms and their employees. Using patents and citations as proxies for innovation and a time-varying index of labor laws, we find that innovation is fostered by stringent labor laws, especially by laws governing dismissal of employees. We provide this evidence using levels-on-levels, changes-on-changes, and finally difference-in-difference regressions that exploit staggered country-level law changes. We also find that stringent labor laws disproportionately influence innovation in those sectors of the economy that are more innovation intensive. Finally, we find that while the overall effect of stringent labor laws is to dampen economic growth, laws that govern dismissal of employees are an exception: dismissal laws promote economic growth, consistent with the evidence that they encourage firm-level innovation.
Article
Analyzing a panel that matches public firms with worker-level data, we find that managerial entrenchment affects workers' pay. CEOs with more control pay their workers more, but financial incentives through cash flow rights ownership mitigate such behavior. Entrenched CEOs pay more to employees closer to them in the corporate hierarchy, geographically closer to the headquarters, and associated with conflict-inclined unions. The evidence is consistent with entrenched CEOs paying more to enjoy private benefits such as lower effort wage bargaining and improved social relations with employees. Our results show that managerial ownership and corporate governance can play an important role for employee compensation. Copyright (c) 2009 The American Finance Association.
Article
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.
Article
We model and experimentally examine the board structure-performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently but tend to destroy value by being too conservative, frequently rejecting good projects. Outsider-controlled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria. Copyright 2008, Oxford University Press.