CEO personal experiences and innovation conservatism: Evidence from China

• Published date: 01 September 2024
• Author: Bin Dong,Dengli Wang,William Senyu Wang,Min Feng
• Date: 01 September 2024
• DOI: http://doi.org/10.1111/corg.12577

ORIGINAL ARTICLE

CEO personal experiences and innovation conservatism:

Evidence from China

Bin Dong

1

| Dengli Wang

2,3

| William Senyu Wang

4

| Min Feng

5

1

School of Economics and Management,

Southeast University, Nanjing, China

2

Quantitative Trading Department, China

Reform Securities, Beijing, China

3

Renmin Business School, Renmin University

of China, Beijing, China

4

Cork University Business School, University

College Cork, Cork, Ireland

5

East China Business Development Unit, Sino-

Ocean Group, Beijing, China

Correspondence

William Senyu Wang, Cork University Business

School, University College Cork, Cork, Ireland.

Email: SWang@ucc.ie

Funding information

Southeast University; University College Cork

Abstract

Research question/issue: This paper studies the relationship between chief execu-

tive officers' (CEOs) personal experiences and corporate innovation in China.

Research findings/insights: We find that CEOs' famine and military experiences

adversely impact firm innovation outcomes. In particular, our channel tests show that

CEOs with famine experience adversely affect firm innovation by reducing both R&D

expenditures and innovation efficiency, whereas CEOs with military experience hin-

der innovation mainly by reducing research staff.

Theoretical/academic implications: Our results imply that innovation conservatism

in some firms may be partly explained by individual CEO's early-life personal experi-

ences. Our study thus has broader implications for the differences in management

style across corporate executives who go through different experiences.

Practitioner/policy implications: Our findings provide important insights for policy

makers, suggesting that they should consider CEOs' early-life exposure to different

experiences as important “soft information”when evaluating firms' innovation

potential for government subsidies.

KEYWORDS

corporate governance, CEO, famine experience, military experience, corporate innovation

1|INTRODUCTION

Prior studies have emphasized the role of CEOs' personal characteris-

tics in shaping corporate policies (e.g., Bamber et al., 2010; Dittmar &

Duchin, 2016; Hirshleifer et al., 2012; Malmendier et al., 2011;

Sauerwald & Su, 2019). This line of research often combines with the

literature within psychology to show that individual life and career

experiences exert a considerable influence on the characters of top

executives and subsequently on their managerial styles which lead to

different firm outcomes (e.g., Bernile et al., 2017; Malmendier &

Nagel, 2011). Although it is well recognized that CEOs' personal

experiences can significantly impact firms in terms of their financial

policies and decision-making processes, little evidence exists on how

these experiences affect corporate innovation.

In this paper, we aim to fill this gap by establishing the link

between CEO personal experiences and firm innovation performance.

We specifically use a sample of Chinese A-share listed companies

1

between 2009 and 2019 to examine the relation between Chinese

CEOs who lived through the Great Chinese Famine in their early life

and corporate innovation output. We additionally test whether CEOs'

military experiences also have an impact on firm innovation activities.

2

Controlling for a group of firm and CEO characteristics, we find that

Received: 13 April 2023 Revised: 9 January 2024 Accepted: 11 January 2024

DOI: 10.1111/corg.12577

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2024 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

Corp Govern Int Rev. 2024;32:915–932. wileyonlinelibrary.com/journal/corg 915

both CEOs' famine experience and military experience are associated

with less corporate innovation, as measured by the number of patent

applications. Further, to mitigate the endogeneity concern that

unobserved personal characteristics jointly determine a CEO's military

service experience and firm innovation policies, we exploit a quasi-

natural experiment created by CEOs' mandatory turnover as an exog-

enous variation in personal experiences to establish the causal link

between the experience of CEOs' military service and firm innovation.

Our difference-in-difference (DiD) analysis confirms the baseline

results.

In additional to the main results, we also employ an innovation

production function to explore the possible channels through which

CEOs' personal experiences operate in order to understand the

mechanisms behind our findings. We find that CEOs with famine

experience reduce corporate innovation outputs by reducing not

only the R&D expenditures but also the efficiency of innovation. In

comparison, CEOs who had military experience adversely impact

their firm innovation by mainly reducing research staff. These

results show that, although both early-life exposure to famine and

military environment can make CEOs behave conservatively in

policy-making, they relate firm innovation outcomes through differ-

ent channels.

Finally, we perform additional analyses to investigate the impact

of CEOs' personal experiences on corporate financial policies (for

which we analyze book and market leverage) and investment deci-

sions (for which we look at capital expenditures and acquisitions) in

China. We find that Chinese CEOs with prior famine or military expe-

rience choose more conservative capital structure policies and lean

toward tangible investments (e.g., CapEx), which are safer and more

certain relative to intangible investments such as R&D. These prefer-

ences reflect their conservative leadership style, which also manifests

itself in firm innovation as we find in this paper.

Our study is motivated by the finding in prior research that early-

life exposure to some macroeconomic, personal, or career-specific

events has a significant impact on individuals' decision-making later in

life (e.g., Benmelech & Frydman, 2015; Graham & Narasimhan, 2004).

It thus adds to a growing body of literature that examines how life

and career experiences of executives affect corporate policies and

outcomes (e.g., Hirshleifer et al., 2012; Malmendier & Tate, 2005;

Schoar & Zuo, 2017). More particularly, our findings on CEOs with a

military background are consistent with those of Benmelech and

Frydman (2015) who show that military service that emphasizes duty,

dedication, and discipline leads to conservatism and risk-aversion in

decision-making later in life. Our paper extends this work by providing

evidence that CEOs who have served in the military before also

behave conservatively in their financial and investment policies.

Finally, our paper is also related to the literature on firm innovation in

a broader setting (e.g., Chava et al., 2013; Zhong, 2018; Chang

et al., 2019; Cumming & Leung, 2021).

The remainder of this paper is organized as follows: Section 2pre-

sents related literature and hypothesis development. Section 3

describes the data, sample, and methodology. Section 4presents the

empirical results. Section 5concludes.

2|HYPOTHESIS DEVELOPMENT

A large body of literature documents that personal characteristics of

firm executives affect corporate decision-making process, policies,

and performance (see, e.g., Hambrick & Mason, 1984; Kaplan

et al., 2012; Quigley & Hambrick, 2015; Ou et al., 2018). Prior

research on behavioral economics shows that personal experiences

play a significant part in shaping an individual's characteristics and risk

preference later in life (Hertwig et al., 2004; Malmendier et al., 2011;

Malmendier & Nagel, 2011). It is therefore expected that executives'

early experiences could shape their characters later, thereby affecting

decisions that lead to various corporate outcomes including

innovation.

Our study thus ties to an important segment of the literature

within psychology that focuses on individuals' personal experiences

and decision-making later on. In particular, Freud (1952) states that

individual behavior is mainly rooted in the memory of past experience

and knowledge which in turn guide people's future behavior through

continuous learning. Kleinsmith and Kaplan (1963) argue that as time

goes by, memories of early experiences that influence personal char-

acters including psychological characteristics do not fade away but

are rather deepened, whereas psychological characteristics enable an

individual to maintain a consistent behavioral tendency in different

environments and events. It thus follows that CEOs with

different early experiences may have different personal characteristics

that lead to different behavioral tendencies when making corporate

innovation policies, which finally influences innovation outcomes. We

hence arrive at the following hypothesis:

H1. CEOs' early experiences have a significant impact

on firm innovation.

Based on the above, this study first focuses on CEOs who experi-

enced the Great Chinese Famine in their early life. This nationwide

catastrophic famine occurred between 1959 and 1961 and is gener-

ally regarded as the deadliest famine in the history of the People's

Republic of China. Referred to as “Three Years of Difficulties”by the

authority, the famine was caused by a series of radical policies includ-

ing the Great Leap Forward and People's Communes

3

coincided with

natural disasters such as droughts and floods and resulted in roughly

50 million unnatural deaths due to starvation and other related illness

during those years (Yao, 1999). The deadliest famine left permanent

scars to those who lived through that period and had gravely immedi-

ate and long-term consequences (e.g., Li & Yang, 2005;

Naughton, 2007). Because the Great Chinese Famine was nationwide,

we expect that almost all the current Chinese CEOs who were born

before 1959 experienced the famine in their childhood.

The extant literature suggests that unwanted early exposure to

such events greatly influences personal characters later in life. Cam-

eron and Shah (2015) argue that people exposed to natural disasters

later exhibit more risk aversion. Choi and Jung (2021) show that

Korean CEOs who were exposed to the Korean war in the 1950s seek

more information transparency when managing their firms than those

916 DONG ET AL.