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Finance Seminar

Author:

• Benjamin Balsmeier
  University of Münster

• Lee Fleming
  University of California

• Gustavo Manso
  University of California

Much research has suggested that independent boards of directors are more effective in reducing agency costs and improving firm governance. Less clear, however, is how they influence innovation and innovation search strategies. We argue that the increased oversight of independent boards results in both greatermanagerial effort and risk aversion; as a result, firms invent more but less novel patents. Relying on regulatory changes for identification, we show that firms that transition to independent boards focus on more crowded and familiar areas of technology. They patent and claim more and receivemore total future citations to their patents, though the citation increase comes mainly from incremental patents in the middle of the distribution; the numbers of uncited and highly cited patents – arguably corresponding to riskier and completely failed or breakthrough inventions, respectively – do not change significantly. Split samples indicate stronger effects for firms with more entrenched managers.