Estimating the effect of board independence on innovation efficiency using research quotient: a quasi-natural experiment

Abstract

Purpose

Exploiting a novel measure of innovation, the authors investigate whether independent directors improve innovation efficiency. This novel measure of innovation captures the extent to which the firm generates revenue from its research & development and is, therefore, more economically meaningful. The authors also use a text-based measure of innovation.

Design/methodology/approach

The authors rely on a quasi-natural experiment based on the passage of the Sarbanes-Oxley Act of 2002 that compelled certain firms to raise board independence. The difference-in-difference analysis is far less vulnerable to endogeneity and is more likely to show a causal influence, rather than a mere association.

Findings

The results show that more independent directors improve innovation efficiency significantly. Specifically, firms forced to raise board independence experienced a much higher increase in innovation than those not required to change their board composition. The authors also explore another novel measure of innovation, a text-based metric of innovation.

Originality/value

The research is original in several ways. First, the authors take advantage of an exogenous regulatory shock as a quasi-natural experiment. This approach is far less susceptible to endogeneity. Second, the authors use a novel measure of innovation efficiency, i.e. research quotient, which is more economically meaningful. Finally, the authors use a unique measure of innovation derived from powerful textual analysis.

Citation

Chatjuthamard, P., Treepongkaruna, S., Jiraporn, P. and Park, K.J. (2023), "Estimating the effect of board independence on innovation efficiency using research quotient: a quasi-natural experiment", Corporate Governance, Vol. 23 No. 7, pp. 1670-1689. https://doi.org/10.1108/CG-12-2022-0487