![]() ![]() Once again, the effect was strong for both low-patent firms, where product development innovation is a primary focus, and high-patent firms, where scientific research and technological innovation are primary focuses. Controlling for patent activity, the researchers found larger improvements in cash flow from operations and return on assets in the ensuing 12 months and two years among firms more active in product trademark creation. In this go-round, product innovation activity also correlates with financial performance at the firm. Prior research Teoh collaborated on, published in Management Science, showed that firms that churn out more trademarks (product and marketing) have higher stock returns in the ensuing 12 months than firms that are less active. The researchers found a similar compensation/innovation relationship when re-running their test based on the option-dependency of employees other than the CEO. That patent-rich companies are responsive to Vega is not surprising the news here is evidence that low-patent firms are innovating as well and option-based risk-taking incentives work well on these firms. Their findings hold for a wide range of firms, including low-patent firms and high-patent firms. The researchers found that increasing from the 25th percentile rank to 75th percentile rank in Vega increased product trademark creation by 9%. Throughout their analysis, they controlled for patent activity, given that among firms with patent activity, a new product trademark can be the end-result of a patent. The researchers studied new product trademark volume relative to CEOs’ Vega levels. The implicit link is that Vega - a compensation metric that measures the sensitivity of CEO wealth to stock price volatility - is “a good proxy for managerial risk-taking incentives.” That is, a CEO with the carrot of boatloads of stock options is likely to be interested in pursuing risky new product innovation that just might be a hit with customers, and thus Wall Street. ![]() Prior research has established that the more a CEO’s wealth is dependent on stock options, the more risk the firm will take. The big run-up in CEO compensation since the mid-1990s is largely the result of doling out massive chunks of stock options. They explored the extent to which CEOs with an incentive to innovate are more likely to run shops that churn out more new product trademarks. Having established that a patent-only approach to measuring innovation is myopic, the researchers turned to new product trademarks as another potential proxy for innovation. Incentivizing Innovation with Stock Options Moreover, the researchers computed that industries they classified as low-patent (an average of fewer than 15 patents per firm year) accounted for more than 60% of sales in their dataset. These findings suggest that R&D and patents fail to capture innovative activities that potentially culminate in new products. And more than 45% of firms with a product trademark never registered a patent. More than half of the companies with new product trademarks the researchers examined did not report investment in R&D. (Note: To specifically drill down on product innovation, the team focused solely on new product trademarks, ignoring trademarks tied to new branding/marketing slogans.) They had more than 70,000 new product trademarks from nearly 3,000 firms to analyze.Īs shown below, in the study period, new patents were highly concentrated in just a few industries, while new product trademarks were more dispersed. The researchers tabulated the patent and product trademark activity of S&P 1500 companies between 1993 through 2011. Arizona State’s Lucile Faurel, Hong Kong Polytechnic’s Qin Li, University of California-Irvine’s Devin Shanthikumar and UCLA Anderson’s Siew Hong Teoh report that both cash flow from operations and return on assets are higher in the first and second years among firms that register more new product trademarks. A paper forthcoming in the Journal of Financial and Quantitative Analysis suggests that plenty of innovation is indeed happening in firms that aren’t big on R&D, or constantly churning out patents.Ĭreating a database that tracked new product trademarks, researchers find that CEOs in low-patent industries, whose compensation is heavily dependent on stock options, seem to be plenty motivated to innovate, as they tend to roll out more new product trademarks.Īnd those new trademarked products seem to contribute to better performance. ![]()
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