Inventor Chief Executive Officers and Firm Innovation

• DOI: http://doi.org/10.1111/irfi.12266
• Date: 01 June 2019
• Published date: 01 June 2019
• Author: G. Mujtaba Mian,Ibrahim Bostan

Inventor Chief Executive Officers

and Firm Innovation*

IBRAHIM BOSTAN AND G. MUJTABA MIAN

College of Business, Zayed University, Dubai, United Arab Emirates

ABSTRACT

Using a novel, manually collected dataset, we find that firms whose chief

executive officer (CEO) is an inventor experience significantly better innova-

tion outcomes, as measured by patents and future citations. We obtain these

results in models with firm fixed effects, in difference-in-difference analysis

of transitioning CEOs that controls for the CEO fixed effects, and among

firms with founder CEOs. Firms led by an inventor CEO also exhibit greater

tolerance for failure as indicated by a greater number of both highly cited

and uncited patents, and engage more in explorative search strategies that

exploit new technological trajectories. Stock market, however, seems unable

to fully capture the positive impact of inventor CEOs on future innovation:

firms whose CEO transitions to be an inventor experience positive abnormal

stock returns, especially during the early years following the transition.

JEL Codes: G14; J24; O31; O32

Accepted: 16 March 2019

I. INTRODUCTION

Inventor chief executive officers (CEOs) lead many large American companies.

In January 2017, the combined market value of such firms exceeds 25% of the

total market capitalization of New York Stock Exchange (NYSE). The examples

include Jeffrey P. Bezos of Amazon, Lawrence Edward Page and Sergey Brin of

Google, Hoyt M. Wells of Goodyear, Theodore W. Waitt of Gateway, Brian

M. Krzanich, and Leslie L. Vadasz of Intel, Steven A. Ballmer of Microsoft, and

Lawrence J. Ellison of Oracle, among many others. Despite the prevalence of

inventor CEOs, their impact on firm performance has not been well under-

stood. While the impact can be multifaceted, one area that is perhaps most

prone to their influence is firm innovation.

1

In this paper, therefore, we study

* We are grateful to Jarrad Harford, Serdar Dinc, Srinivasan Sankaraguruswamy, Yongtae Kim, and

participants of seminar at Zayed University for helpful comments. Any remaining errors are solely

our responsibility.

1 It is not uncommon to see the business press attributing the innovative success of large Amer-

ican companies to the personal innovation prowess of their leaders. See, for example, Inven-

tor as CEO—Good or Bad? by Rob Spiegel, Automation and Motion Control, July 9, 2015,

and CEO By Day, Inventor at Night by George Anders, Forbes, July 16, 2012.

© 2019 International Review of Finance Ltd. 2019

International Review of Finance, 19:2, 2019: pp. 247–286

DOI: 10.1111/irfi.12266

the relationship between inventor CEOs and the success of firm innovation.

We also examine whether this relationship has any discernible effect on stock

price performance.

An inventor CEO can enhance firm innovation in many ways. When the

leader is an inventor, the transfer of knowledge from lower segments of innova-

tion processes toward the top can be more efficient (Grant 1996), allowing

inventor CEOs to better evaluate the potential, the complexities and the limita-

tions of various research and development projects going on in the firm.

2

This

in turn can lead to better resource allocation (Rothwell 1977) and better align-

ment of incentives for inventors (Adler and Borys 1996). Furthermore, having

gone through the process of innovation, she is likely to be more cognizant of

the risky and long-term nature of innovation, and may invest more in projects

that appear risky in the short term but have the potential to yield greater

rewards in the long term (Manso 2011). Because pay for performance and other

incentive packages may be insufficient to encourage innovation (Manso 2011),

it is possible that the real motivation to innovate comes from inside. An inven-

tor executive will have the intrinsic motivation to innovate; that is, she will

enjoy innovation herself and will not do her job solely for the sake of higher

market value or better compensation packages. Their personal enthusiasm for

R&D may also allow inventor CEOs to nurture an innovation-centric culture

that encourages risk taking and experimentation across various layers of the

organization (Rothwell 1977). Conversely, however, it is also possible that

inventor CEOs impede innovation by developing a kind of tunnel vision and

becoming obsessed with research and development to the neglect of other func-

tional areas. They may end up focusing on innovations that are “technically

nice”and satisfy the ego of the inventors, but have little to offer the user and

become commercial failures. It is therefore an empirical question as to whether

inventor CEOs enhance or impede firm innovation.

We assemble a novel dataset of inventor CEOs by matching the CEO infor-

mation available in Standard and Poor’s Execucomp database with the pat-

enting information in the inventor database of Li et al. (2014). The latter

dataset contains information on more than two million unique inventors to

whom approximately 3.8 million patents have been granted by the United

States Patents and Trademark Office. The matching process is elaborate and

requires manual verification of records that cannot otherwise be matched using

computer algorithms. We classify the CEOs that have at least one patent regis-

tered in their name as inventor CEOs, beginning the year in which they file for

their first patent. Identifying the year of the filing of the first patent as the tran-

sition point when the CEO switches from being a noninventor to an inventor,

2 In an article in Forbes, Sanjay Mahrotra, the CEO of ScanDisk, explains how his inventor’s

background has proven invaluable in leading the company. “It’s helped me a great deal in

understanding the capabilities of our technology, and in assessing the complexities of the

challenges ahead. That makes a big difference in determining strategic plans and in managing

execution. It becomes easier to focus attention on the right issues.”(https://www.forbes.com/

sites/georgeanders/2012/07/16/geniuses-or-dabblers/#b4f725a231a9

© 2019 International Review of Finance Ltd. 2019248

International Review of Finance

also allows us to conduct an after-versus-before analysis that isolates the effect

of the innovation experience from the innate, time-invariant ability of

the CEO.

In our base case analyses, we run panel regressions where commonly used

measures of firm-level innovation—number of patents and future citations—are

regressed on an indicator variable for inventor CEO and a host of firm- and

CEO-level controls, which include firm profitability, growth opportunities, CEO

overconfidence (Galasso and Simcoe 2011; Hirshleifer et al. 2012), and CEO age

(Acemoglu et al. 2015), among others. We also include R&D intensity of the

firm as a control in all specifications. Industry and year, or firm and year fixed

effects, also enter the specification alternately. The results indicate that firms

with an inventor CEO innovate significantly more than firms with a

noninventor CEO. Depending on the model specification, a transition to an

inventor CEO is associated with an increase in number of patents by 13%–31%

and an increase in future citations of 37%–59%. Inclusion of firm fixed effects

allays concerns that our results are driven by unobservable, time-invariant dif-

ferences across firms.

To strengthen a causal interpretation of our results, we conduct a difference-

in-difference (DiD) analysis in which we focus on companies whose CEO transi-

tions into an inventor CEO during our sample while remaining at the same firm.

We find that the firms whose CEOs make this transition experience significant

improvements in their innovation outcomes in the period following the transi-

tion, and that this improvement exceeds any which is observed among the con-

trol firms. This DiD analysis controls for the CEO fixed effects and helps isolate

the effect of innovation experience from the innate time-invariant ability of

the CEO.

We also estimate our panel regressions using the sample of firms that are

run by founder CEOs, as concerns about time-varying endogenous matching

between CEOs and firms should be less pronounced for such firms

(Chaudhuri et al. 2013; He and Hirshleifer 2017) Specifically, we compare the

firms founded by those inventor CEOs who become inventors either before or

during the early (i.e., first three) years of the life of their firm with those firms

that are founded by noninventor CEOs. We find that firms set up by inven-

tors achieve superior innovation outcomes than other firms after controlling

for other CEO and firm characteristics such as R&D expenditure and industry

classification.

Though we attempt to show a link between inventor CEOs and firm innova-

tion after controlling for endogenous matching between firms and CEOs, the

presence of any such matching does not necessarily negate our assertion. Sup-

pose, for instance, that firms appoint inventor CEOs at times when they want

to increase their focus on innovation, or/and a CEOs gets involved in innova-

tion when her firm needs to make innovation a key part of its strategy. If so,

such preferences would themselves indicate a belief among boards and CEOs

that the hands-on innovation experience of CEO helps enhance firm

innovation.

© 2019 International Review of Finance Ltd. 2019 249

Inventor CEOs and Firm Innovation