Motivating corporate innovation by option-based compensation - evidence on the U.S. board of directors

Abstract

I examine the relation between corporate innovation and option-based compensation issued for board of directors with particular focus on the non-executive director options. My findings support the prior research by providing new evidence on the positive effect of non-executive and executive director stock option compensation on motivating corporate innovation. Consistent with earlier literature, I find that unexercised options with lower current value and longer expiration time act as better incentives for risk-taking and investing in innovation for non-executive directors. However, exercising the non-executive options and the length of expiration time affects the innovation less than suggested by prior research.