Radical or Incremental Innovations: R&D Investment Around CEO Retirement. (October 2014)

• Record Type: Journal Article
• Authors: Xu, Crystal; Yan, Meng
• Is Part Of: Journal of accounting, auditing & finance. Volume 29:Number 4(2014:Oct.)
• Page Start: 547
• Page End: 576
• Publication Date: 2014-10
• Subjects: CEO retirement -- innovations -- patents and citations -- CEO compensation; Accounting -- Periodicals; Auditing -- Periodicals; Finance -- Periodicals; 657
• DOI: 10.1177/0148558X14538970
• Languages: English
• ISSNs: 0148-558X

Abstract

We study the impact retirement has on how CEOs spend R&D funds. Consistent with retiring CEOs' short horizons and growing conservatism, we find evidence that CEOs tend to prefer incremental innovations as they approach retirement. Using patent data to measure firms' innovation outputs, we find that firms receive fewer patent grants for applications filed toward the end of CEO tenures, and these patent grants receive fewer subsequent citations. Moreover, we find that large amounts of vested, in-the-money option holdings exacerbate retiring CEOs' preference for incremental innovations, and founder CEOs pursue incremental innovations to a greater extent than non-founder CEOs close to retirement. However, a normal "relay process" of managerial succession and higher stock ownership by independent directors mitigate retiring CEOs' preference for incremental innovations. We find no evidence that the documented incremental innovations before retirement are driven by either poor firm performance or a general shift from innovation to stability as CEO tenures increase or as CEOs age. Overall, the study identifies a new type of myopic behavior related to CEO retirement and highlights the importance of looking beyond R&D spending in future studies on the managerial investment myopia.