Do General Managerial Skills Spur Innovation?

Abstract

We show that firms with chief executive officers (CEOs) that gather general managerial skills during their lifetime work experience produce more innovation. Firms with generalist CEOs invest more in R&D and produce more patents than those with specialist CEOs. Generalist CEOs also create more diverse and original patent portfolios. We address the potential endogenous CEO-firm matching bias using firm fixed effects and the variation on the enforceability of non-competing agreements across states and time as an instrument for general managerial skills. Our findings suggest that generalist CEOs spur innovation because they have skills that can be applied elsewhere should risky innovation projects fail. We conclude that an efficient labor market for executives can promote corporate innovation by acting as mechanism of tolerance for failure.JEL classification: G32, J24, O31

Innovative CEO-Directors

“…In particular, through appointing CEOs of innovative firms onto the board, a firm can fill the knowledge gap between different technology fields and identify new industry and technology trends, which in turn improves the firm's innovation output. Moreover, our findings further confirm the important role of managerial quality in promoting technological innovation (Chemmanur et al 2014, Cho et al 2016, Custodio et al 2015.…”

“…If there are omitted variables or unobservables that affect firm innovativeness as well as the number of outside directorships, then the estimation will be biased. For example, recent studies find that CEOs with better managerial ability produce better innovation outcomes (Chemmanur et al 2014, Cho et al 2016, Custodio et al 2015, although we control for several factors that can reflect a CEO's managerial ability, there is still a chance that the association between firm innovativeness and the number of outside directorships held by CEOs is driven by unobserved CEO managerial ability. To address this endogeneity, we use urban industrial diversity as the exogenous variable to instrument our firm innovativeness measures.…”

“…By appointing the CEO of an innovative firm onto its board, a firm can benefit from this CEO's expertise and experience. Recent studies underscore the value of a CEO's human capital on a firm's innovation activities and show that the CEO's observable human capital (such as their personal networks and general managerial skills gained over their education and work experience) and unobservable ability (measured by manager fixed effects) impact the variation in a firm's innovation performance (Chemmanur et al 2014, Cho et al 2016, Custodio et al 2015, Faleye et al 2014. In this paper, we ask whether a CEO's proven ability to cultivate and promote innovation in her own firm is recognized by the labour market for outside directors and how the appointing firms benefit from the appointment of an innovative CEO-director.…”

Misvaluation and Corporate Inventiveness

“…Previous literature refers to what we call "scope" as "innovative generality." For applications of innovative originality and scope, see also Hall, Jaffe, and Trajtenberg (2001), Lerner, Sørensen, and Strömberg (2011), Custodio, Ferreira, and Matos (2013), and Hirshleifer, Hsu and Li (2018). Section 2 discusses in more depth the motivation for and estimation of the three dimensions of innovation inventiveness.…”

CEO Incentives and Product Development Innovation: Insights from Trademarks

“…2 See Dechow and Sloan (1991), Barker and Mueller (2002), Galasso and Simcoe (2011), Hirshleifer, Low, and Teoh (2012), Bereskin and Hsu (2013), and Custodio, Ferreira and Matos (2014). 3 See Smith and Stulz (1985), Hirshleifer and Suh (1992), Datta, Iskandar-Datta, and Raman (2001), Rajgopal and Shevlin (2002), Coles, Daniel and Naveen (2006), Xue (2007), Francis, Hasan and Sharma (2011), Manso (2011), Currim, Lim and Kim (2013), and Baranchuk, Kieschnick, and Moussawi (2014).…”