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Do Better-Connected CEOs Innovate More?

Published online by Cambridge University Press:  08 April 2015

Olubunmi Faleye ,
Tunde Kovacs  and
Anand Venkateswaran
Olubunmi Faleye
Affiliation:
o.faleye@neu.edu, D’Amore-McKim School of Business, Northeastern University, 360 Huntington Ave, Boston, MA 02115
Tunde Kovacs
Affiliation:
tunde_kovacs@uml.edu, Manning School of Business, University of Massachusetts Lowell, 1 University Ave, Lowell, MA 01854.
Anand Venkateswaran
Affiliation:
a.venkateswaran@neu.edu, D’Amore-McKim School of Business, Northeastern University, 360 Huntington Ave, Boston, MA 02115
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Abstract

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We present evidence suggesting that chief executive officer (CEO) connections facilitate investments in corporate innovation. We find that firms with better-connected CEOs invest more in research and development and receive more and higher quality patents. Further tests suggest that this effect stems from two characteristics of personal networks that alleviate CEO risk aversion in investment decisions. First, personal connections increase the CEO’s access to relevant network information, which encourages innovation by helping to identify, evaluate, and exploit innovative ideas. Second, personal connections provide the CEO with labor market insurance that facilitates investments in risky innovation by mitigating the career concerns inherent in such investments.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 49 , Issue 5-6 , December 2014 , pp. 1201 - 1225
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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