Academic journal article Innovation: Organization & Management

Corporate Governance and Innovative Success: An Examination of the Moderating Influence of a Firm's Life Cycle Stage

Academic journal article Innovation: Organization & Management

Corporate Governance and Innovative Success: An Examination of the Moderating Influence of a Firm's Life Cycle Stage

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Many studies in the literature discussing ways to improve productivity talk about engag- ing in research consortia (e.g., Dodgson, Mathews, & Kastelle, 2006) and increased collaboration between companies (e.g., Wolfe & Bramwell, 2008). Few studies discuss corporate governance as a mechanism for improving innovation. However this is an important area to examine. In this study we add to the research on the influence of corporate governance by examining the impact of corporate governance on the innovative success of a firm. Since studies on innovation have observed that the life cycle stage of a firm is important and should be factored in (e.g., Chiang, Lee, & Anandarajan, 2012), we also examine if this association is influ- enced by the stage of the firm in its respective life cycle. In essence, our study straddles two key areas: research involving the consequences and beneficial influence of corporate governance, and research examining how life cycle stage influences various dimensions of a firm's activity and performance. In the first category, the general conclusions from the research are that corporate governance, especially higher levels of governance (1) has a positive impact on firm performance, (2) reduces the proclivity of managers to engage in earnings manipulation and (3) positively influences stock prices. In the second category, involving life cycle analysis, research shows that the stage of a firm in its life cycle influences the firm's structure with respect to overall firm per- formance. For instance, Anandarajan, Chiang, and Lee (2010) focused on examining how the R&D tax credit influences a firm's operating performance and the influence of the stage of the firm's life cycle on this association. They found first, that the R&D tax credit had a positive impact on operating per- formance; second, that the impact of the R&D tax credit on operating performance is accentuated when the firm is in the mature and declining stage of its life cycle; third, that the impact of the R&D tax credit is more pronounced for smaller relative to larger firms. The implication is that regula- tors should be aware that the tax credit has most impact for smaller firms and firms in the mature and declining stage. Similarly, Chiang et al. (2012) examining the influence of the R&D tax credit on investment in R&D, noted a positive association overall, but the effect was moderated by the firm's stage in its respective life cycle with the effect being most pronounced for firms in the stagnant stage.

In this study we examine how 'innovative success' is influenced by the level of corporate governance and whether the stage of the firm in its respective life cycle affects the association between innovative success and corporate governance.

Based on Mansfield (1981) we break down innovative success into three components, namely, technical success (as measured by an average number of patents received), commercial success (measured by a sales growth ratio) and economic success (measured by the Tobin's Q ratio). Overall, our results indicate that corporate governance pos- itively influences technical success and economic success but does not significantly impact commer- cial success. That is, higher corporate governance has a positive impact on patent productivity and a firm's values. However, it does not influence sales growth. In essence the results indicate that while corporate governance per se does not appear to be associated with sales growth, it is positively associated with innovation and this information is appreciated by investors and incorporated in stock price. We also find that the stage of the firm in its respective life cycle does moderate this associa- tion. In particular, the influence of corporate gov- ernance on 'innovative' success is most beneficial in the stagnant stage and least influential when the firm is in the growth stage. Overall, our findings can assist managers understand how corporate governance can best help them get the most out of their innovative efforts taking the firm's life cycle stage into consideration. …

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