Unintended consequences of compensation peer groups on corporate innovation

Yuan Teng Hsu, Chia Wei Huang*, Kees G. Koedijk

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

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Abstract

When companies select and use compensation peers to determine chief executive officer (CEO) compensation, they create unintended peer effects on corporate innovation due to the similarities between these companies and their compensation peers in terms of product markets, CEO characteristics, and compensation schemes. After controlling for industry and geography peer groups, the findings confirm that the average innovation activity of compensation peers is a significant and distinct predictor of corporate innovation. Further analysis showed that (1) the peer effect is stronger in firms and compensation peers that pay their CEOs using long-term compensation, in firms with stronger labor market competition and board monitoring, and in peer companies that experience higher innovation competition and are closer to the median peer company in the peer group; (2) the obtained results are likely not attributable to the knowledge spillover mechanism and are more consistent with the peer pressure mechanism; and (3) the Securities and Exchange Commission's 2006 executive compensation disclosure rules may have generated peer effects.

Original languageEnglish
Article number102321
Pages (from-to)1-29
Number of pages29
JournalJournal of Corporate Finance
Volume78
Early online date17 Nov 2022
DOIs
Publication statusPublished - Feb 2023

Bibliographical note

Funding Information:
☆ We are especially grateful for constructive comments from Xuan Tian (the editor) and an anonymous referee. We also thank Kam C. Chan, Konan Chan, Ching-Hung Chang, Chuang-Chang Chang, Hong-Yi Chen, Sheng-Syan Chen, Yan-Shing Chen, Victor Chow, Keng-Yu Ho, Ching-Yu Hsu, Rachel Juiching Huang, Chuan-Yang Hwang, Cheng-yi Shiu, Yanzhi Wang, and seminar participants at Jiangxi University of Finance and Economics, Jilin University, National Central University, National Chengchi University, National Taiwan University, National Yunlin University of Science and Technology, and Shanghai Business School for helpful comments and suggestions. Chia-Wei Huang gratefully acknowledges financial support from the National Science and Technology Council (formerly the Ministry of Science and Technology) of Taiwan.

Funding Information:
We are especially grateful for constructive comments from Xuan Tian (the editor) and an anonymous referee. We also thank Kam C. Chan, Konan Chan, Ching-Hung Chang, Chuang-Chang Chang, Hong-Yi Chen, Sheng-Syan Chen, Yan-Shing Chen, Victor Chow, Keng-Yu Ho, Ching-Yu Hsu, Rachel Juiching Huang, Chuan-Yang Hwang, Cheng-yi Shiu, Yanzhi Wang, and seminar participants at Jiangxi University of Finance and Economics, Jilin University, National Central University, National Chengchi University, National Taiwan University, National Yunlin University of Science and Technology, and Shanghai Business School for helpful comments and suggestions. Chia-Wei Huang gratefully acknowledges financial support from the National Science and Technology Council (formerly the Ministry of Science and Technology) of Taiwan.

Publisher Copyright:
© 2022

Funding

☆ We are especially grateful for constructive comments from Xuan Tian (the editor) and an anonymous referee. We also thank Kam C. Chan, Konan Chan, Ching-Hung Chang, Chuang-Chang Chang, Hong-Yi Chen, Sheng-Syan Chen, Yan-Shing Chen, Victor Chow, Keng-Yu Ho, Ching-Yu Hsu, Rachel Juiching Huang, Chuan-Yang Hwang, Cheng-yi Shiu, Yanzhi Wang, and seminar participants at Jiangxi University of Finance and Economics, Jilin University, National Central University, National Chengchi University, National Taiwan University, National Yunlin University of Science and Technology, and Shanghai Business School for helpful comments and suggestions. Chia-Wei Huang gratefully acknowledges financial support from the National Science and Technology Council (formerly the Ministry of Science and Technology) of Taiwan. We are especially grateful for constructive comments from Xuan Tian (the editor) and an anonymous referee. We also thank Kam C. Chan, Konan Chan, Ching-Hung Chang, Chuang-Chang Chang, Hong-Yi Chen, Sheng-Syan Chen, Yan-Shing Chen, Victor Chow, Keng-Yu Ho, Ching-Yu Hsu, Rachel Juiching Huang, Chuan-Yang Hwang, Cheng-yi Shiu, Yanzhi Wang, and seminar participants at Jiangxi University of Finance and Economics, Jilin University, National Central University, National Chengchi University, National Taiwan University, National Yunlin University of Science and Technology, and Shanghai Business School for helpful comments and suggestions. Chia-Wei Huang gratefully acknowledges financial support from the National Science and Technology Council (formerly the Ministry of Science and Technology) of Taiwan.

Keywords

  • Compensation peer group
  • Patent
  • Peer effect
  • R&D expenditure

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