Do Better-Connected CEOs Innovate More?

Abstract

We present evidence suggesting that chief executive officer (CEO) connections facilitate investments in corporate innovation. We find that firms with better-connected CEOs invest more in research and development and receive more and higher quality patents. Further tests suggest that this effect stems from two characteristics of personal networks that alleviate CEO risk aversion in investment decisions. First, personal connections increase the CEO's access to relevant network information, which encourages innovation by helping to identify, evaluate, and exploit innovative ideas. Second, personal connections provide the CEO with labor market insurance that facilitates investments in risky innovation by mitigating the career concerns inherent in such investments.

Corporate Innovation: Do Diverse Boards Help?

“…Sunder, Sunder, and Zhang (2017) report that CEOs with pilot licenses are successful in corporate innovation. Faleye, Kovacs, and Venkateswaran (2014) find that better-connected CEOs invest more in R&D and their firms file more and higher-quality patents. Custodio, Ferreira, and Matos (2019) show that CEOs with general managerial ability spur innovation because they acquire knowledge beyond the firm's current technological domain and are less sensitive to the risk of termination.…”

How Do Foreign Institutional Investors Enhance Firm Innovation?

“…The literature has suggested that the locus of innovation and knowledge circulation lies in dynamic, competency-based business networks (Voss (2003), Walters and Buchanan (2001), and Wright and Burns (1998)). One example is that CEO network connections facilitate corporate innovation (Faleye, Kovacs, and Venkateswaran (2014)). In this regard, there is anecdotal evidence suggesting that foreign institutional investors could facilitate networks among different stakeholders.…”

The bright side of co‐opted boards: Evidence from firm innovation

“…Likewise, Faleye, Hoitash, and Hoitash (2011) demonstrate that while monitoring quality improves when a majority of independent directors are very “hands‐on” in their monitoring duties, firms with boards that intensely monitor the management experience less firm innovation. In another study, Faleye, Kovacs, and Venkateswaran (2014) document that firms whose CEOs are better connected through their past employment, education, and social networks receive more and higher quality patents. Likewise, using the social connections between directors and their CEO as a measure of board friendliness, Kang et al.…”