Managerial Short-Term Compensation and Innovation: Evidence from China

Abstract

This study explores the influences of managerial short-term compensation on firm’s innovation. Using a large sample of China’s listed firms for the period 2007-2015, we find managerial short-term compensation is significantly and positively related to firm’s innovation. Managers with more short-term compensation invest more in innovation, obtain more patents, and achieve greater innovative success for given research and development expenditures. In addition, we find that the positive relationship between managerial short-term compensation and innovation is more pronounced when firms have strong external monitoring mechanisms such as high analyst coverage and high institutional ownership. Our findings suggest that short-term compensation motivates managers to become better innovators.