The effect of innovation performance shortfall on firms’ trade-offs between exploratory and exploitative innovation: Do corporate governance factors matterʔ

Abstract

Whether and when innovation performance shortfall (innovation performance below innovation aspiration) affects firms’ trade-offs between exploratory and exploitative innovation remains an important unexplored question. Based on insights from behavioral theory of the firm and agency theory, we propose that as the innovation performance shortfall widens, firms will devote more resources to exploratory innovation rather than to exploitative innovation. That is, innovation performance shortfall positively affects firms’ relative exploratory innovation emphasis. Furthermore, we propose that board monitoring capacity and analyst coverage enhance the positive effect of innovation performance shortfall on firms’ relative exploratory innovation emphasis. Using data on Chinese listed companies from 2008 to 2020, we obtain empirical evidence supporting most of the above theoretical views.