Pilot CEOs and Corporate Innovation

Jingjing Zhang is Assistant Professor of Accounting at McGill University Desautels Faculty of Management. This post is based on a recent article authored by Ms. Zhang, Jayanthi Sunder, Associate Professor of Accounting at the University of Arizona Eller College of Management, and Shyam Sunder, BeachFleischman Professor of Accounting at the University of Arizona Eller College of Management.

Corporate innovation is an important driver of firm value. However, given the inherently risky nature of innovation outcomes, CEOs would be reluctant to undertake innovation. Mainstream research in economics has focused on extrinsic motivation though the design of financial incentives. An alternative solution is to select CEOs with the right temperament for innovation. A recent survey of 5,000 executives in innovative companies, Dyer, Gregersen, and Christensen (2011) find that successful innovators exhibit certain behavioral attributes, suggesting the potential role of intrinsic motivation in affecting firms’ innovation success. In our recent article, Pilot CEOs and Corporate Innovation, published in the Journal of Financial Economics, we examine the relative effectiveness of the CEO’s intrinsic versus extrinsic motivation on corporate innovation. The lack of attention on intrinsic motivation is largely due to the fact that it is difficult to observe and measure the behavioral traits of successful innovators in a large-scale sample.

We identify sensation seeking, a personality trait defined as the search for novel and intense experiences that entail risks (Zuckerman, 1971), as a personality trait that provides intrinsic motivation for innovation. Prior research in psychology finds that, because sensation seekers are curious and open to new experiences, they are more likely to be creative in their personal life. We find sensation seeking CEOs based on an observable choice to fly planes since the desire to fly has been shown as one of the highest predictors of sensation seeking (Zuckerman, Eysenck, and Eysenck, 1978). We hand collect CEOs’ pilot credentials using the airmen certificate records from the U.S. Federal Aviation Administration (FAA). 7.3% of CEOs in our sample have a pilot certificate.

Our results indicate that firms led by pilot CEOs are more successful in innovation, where innovation is measured by the number of patents and the associated citations. The magnitude of the effect is statistically significant and economically large. Our estimates suggest that the number of patents (citations) increases by 66.7% (43.9%) for firms with a pilot CEO, after controlling for firm characteristics, year and industry fixed effects, and CEO characteristics, including age, human capital proxied by CEO tenure and academic achievement, military experience, and overconfidence.

Further analyses show that firms with a pilot CEO obtain better innovation outcomes by improving innovation effectiveness and pursuing diverse, original, and high-impact innovation projects. These results are in contrast with the results of firms that provide risk-taking incentives to CEOs through compensation. We find that extrinsic motivation through compensation contracts makes CEOs invest more in research and development (R&D). However, once we control for R&D spending, we do not find the incremental effect of CEO compensation on innovation performance. These differential results demonstrate the limits of using financial incentives to motivate innovation and highlight the value of intrinsic motivation in achieving innovation success.

Common to studies examining CEO characteristics, there are two distinct but related interpretations of our results, i.e., imprinting and matching. Pilot CEOs are able to exert direct influence on the firm’s innovation activities. Alternatively, firms that value innovation may choose to hire pilot CEOs who possess desirable personality traits. Matching is not inconsistent with imprinting because firms may appoint pilot CEOs with the expectation that they are able to drive corporate innovation. We examine changes in the patent and citation counts around CEO turnovers and find that, keeping the firm constant, pilot CEOs are associated with higher patent and citation counts. Moreover, the influence of the new CEO on innovation outcomes is increasing over the first three years following the turnover, suggesting that CEO imprinting is an important explanation for our results. We also examine and rule out other alternative explanations for our results.

Our study provides new empirical support for the importance of managerial intrinsic motivation on tasks requiring creativity in the corporate setting. One direct implication of our findings to boards and shareholders is to help them identify corporate leaders who are likely to excel at innovation.

The full article is available for download here.


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