Exploration or exploitation? A study on equity incentive design, dynamic decision making, and economic consequences.

Area of Science:

• Business Administration
• Innovation Management
• Corporate Finance

Background:

• Equity incentives are common in firms to align management and shareholder interests.
• Understanding the dynamic impact of these incentives on innovation strategy is crucial for sustained growth.

Purpose of the Study:

• To investigate how equity incentives influence exploratory innovation strategies.
• To analyze the temporal dynamics of innovation strategy under equity incentive schemes.

Main Methods:

• Utilized data from China's listed companies (2006-2017) on equity incentives.
• Constructed measures for exploratory intensity of innovation.
• Employed cross-sectional and time-series analyses.

Main Results:

• A positive cross-sectional relationship exists between equity incentive vesting periods and exploratory innovation.
• Time-series analysis revealed a shift towards exploitative innovation after the third incentive period.
• The effect was more pronounced in smaller firms and during non-financial crisis periods.

Conclusions:

• Equity incentives have a complex, time-dependent effect on innovation strategy.
• Long-term equity incentives may hinder exploratory innovation, impacting output and performance.
• Firm size and economic conditions moderate the relationship between equity incentives and innovation.