The Relationship Between Subordinate Executives' Checks And Balances On CEO And Corporate Innovation

Innovation is the living spring that nourishes the sustainable development of the economy and is the light that leads a nation to prosperity.According to the Global Innovation Index report of year 2017,China's ability to innovate is improving continuously,but there still exists a gap between China's innovation ability and America.In addition,according to the Global Innovation Index report,Our R&D/GDP ranks 17th in the world,and the PCT patents applied by per 10,000 corporate researchers ranks 27th in the world,which is relatively lower than the GDP ranking of China.The enterprise is the main force of a country's scientific and technological innovation,and there are many factors that affect the ability of innovation in an enterprise.But the current literature mainly focuses on the impact of the corporate governance environment on the corporate innovation.Corporate governance includes external governance and internal governance.Furthermore,External governance environment includes policy environment and market environment.While the internal governance environment is the incentives,supervision,and checks and balances in the internal company which produced by company's organizational structure to ensure the effectiveness of corporate governance,which including the shareholders,the board of directors,the board of supervisors,the manager and so on.The internal governance environment of an enterprise affects the effectiveness of the external governance environment.Therefore,under the macro-environment where China vigorously implements innovation policies and supports enterprise innovation,the significance of building effective internal governance environment is particularly significant.In the research field of internal governance environmental,few people are concerned about the impact of the checks and balances of subordinate executives on the CEO on the company's innovation.Most of the literature explicitly or implicitly assumes that CEO is the sole decision maker for company investment decisions.However,the company's investment activities are the result of a joint effort of all executives,only considering the CE0's internal governance role does not provide a complete picture.Therefore,this article mainly focuses on the impact of the internal governance effects generated by the subordinate executives on corporate innovation.The subordinate executives refer to executives other than CEO disclosed in the annual reports of listed companies.As argued in Acharya et al.(2011),subordinate executives have strong incentives not to take actions that increase short-term performance at the expense of long-term firm value,because they are more concerned about the performance of their company in the near future when they are promoted as CEO.Therefore,the subordinate executives have the motivation and ability to supervise and influence CEO's decision according to Cheng et al.,(2016).So it can be reasonably predicted that the junior executives have the motivation and ability to supervise the CEO's investment decision on innovation,and the checks and balances of subordinate executives on CEO will promote company's innovation input and innovation performance.This article,inspired by Cheng et al.(2016),analyzes the relationship between internal governance effectiveness and corporate innovation from the perspective of from the checks and balances subordinate executives on CEO.Therefore,our measurements of the explanatory variable are also inspired by Cheng et al.(2016).We use the number of years until retirement age(assumed to be 60)to capture the decision horizon of these executives and we use the level of their compensation relative to the CEO's to capture their influence.We use two indicators,namely innovation input indicators and innovation performance indicators,to measure the dependent variable.Considering that the internal governance effects of the checks and balances of subordinate executives on CEO may not appear immediately,we use the value of year t+1 of the dependent variable in our regression model.We expect that the longer the horizon and the higher the relative compensation,the more effective is internal governance,and the higher the corporate innovation.We test our hypothesis using 9435 firm-year observations from the CSMAR database of listed companies in China in the period 2008-2016,and the empirical results turn out to be consistent with our prediction.We find that the key subordinate executives do play a role of checks and balances on CEO,which improves the effectiveness of internal governance.Besides,we find that the effectiveness of internal governance becomes weaker for companies where CEO are on board with more opportunities to manipulate investment decisions,so becomes weaker the relationship between internal governance effectiveness and corporate innovation.We also find that the effectiveness of internal governance becomes stronger when it takes longer to be promoted as CEO,so becomes stronger the relationship between internal governance effectiveness and corporate innovation.Moreover,in the robust test,our article separately changes the measurement method of innovation investment indicator and the measurement method of internal governance effectiveness indicator.The assumption still turns out to be established.We start this article mainly from the perspective of subordinate executives to study the impact of subordinate executives on corporate innovation.We make two main contributions to literature of our study:On the one hand,our research enriches domestic and foreign research on internal governance.At present,domestic and foreign companies mainly study the relationship between the internal governance effects generated by the checks and balances of the subordinate executives on CEO and the actual earnings management activities of the company,but do not specifically consider the impact on innovation.This article continues to study in depth the internal governance effects of subordinate executives in internal governance.Moreover,this paper also introduces moderate variables to study the relationship between the checks and balances of subordinate executives on CEO and corporate innovations in different circumstances,and enriches the relevant literature in the field of internal governance;On the other hand,our research enriches the current research on the factors which influence corporate innovation in China.We start this article from a new perspective and explore how the members of the subordinate executives influence corporate innovation.There are a large number of literature research the relationship between corporate governance mechanisms and corporate innovation which triggered by agency issues,which are mainly concerned with the CEO's impact on corporate innovation,but few people are concerned about the impact of subordinate executives on corporate innovation.The research helps to find a new way to improve company's innovation.Although there is a certain degree of innovation in this research,the exploration of the checks and balances exerted by the subordinate executives on CEO is still not enough.The mechanism of the checks and balances of subordinate executives on CEO and the internal governance effects of such checks and balances still require further research and demonstration.