Corporate governance, innovation input and corporate performance: Empirical research based on endogeneity and industry categories

1. Introduction

As science and technology are evolving rapidly, companies are compelled to invest in innovation to enhance their core competitiveness, whether through the national strategy of innovation-driven development, or the challenges of excess capacity and transformation and upgrading of traditional industries. For most companies in China, a manufacturing powerhouse, most of innovation activities mainly involve R&D investment in products and technology. A large number of studies have shown that innovation input can promote the company’s profitability and improve the corporate performance. However, the innovation input itself is characterized by great uncertainty, high risk and intertemporal earnings. Therefore, in the organizational structure of a company with agency problems, how senior managers weigh the relationship between short-term benefit and future development becomes the main factor influencing the innovation input decision.

First, traditional theories believe that R&D innovation can improve corporate performance. However, with the improvement of corporate performance, whether the intensity of R&D investment can be maintained and whether the current target performance will lead to the myopic behavior of the management to reducing R&D expenditure has not been studied thoroughly. Based on the principal-agent theory and the management defense hypothesis, in the context of information asymmetry, the management may favor the non-corporate value maximization behavior, which benefits their position and interests (Jensen and Meckling, 1976). However, financial performance assessment is often one of the key indicators to decide whether the management should stay. Therefore, the management will usually try their best to increase corporate profits and cut costs so as to achieve the current target performance. Undoubtedly, this phenomenon will induce managers to intentionally reduce the current cash expenditures with large uncertainties, such as R&D investment, to meet the target financial performance, thus jeopardizing the long-term development of enterprises. Therefore, it is very necessary to study the feedback of corporate performance on its innovation input as well as the endogenous relationship between the two.

Second, the will of top management plays a leading role in the decision-making of innovation activities, and an effective executive incentive mechanism is the necessary guarantee for enterprise R&D investment and company operation. As the income of managers mainly comes from short-term remuneration returns, while remuneration returns depend on their short-term operating performance, managers are often wary of innovative R&D projects...

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