Managerial conservatism, board independence and corporate innovation

Using panel data on U.S. public firms, we document a positive effect of board independence on corporate innovation. This effect is concentrated in firms that are larger in size, in the nontechnical industries, facing less product market competition, and using more debt, where managers are more likely to be excessively risk averse. We establish causality of board independence on innovation using a difference-in-difference approach that exploits an exogenous shock to board composition, namely, the mandate of a majority of outside directors on company boards by NYSE and NASDAQ in response to the passage of Sarbanes-Oxley Act in 2002. We further examine incentive compensation as a possible mechanism. We show that firms with more independent boards use more equity-based compensation, especially stock options, to promote managerial risk-taking. (C) 2017 Elsevier B.V. All rights reserved.