Document Type

Article

Publication Date

11-2013

Abstract

Career concerns provide managers with implicit incentives, which benefit shareholders. However, these concerns are also costly to shareholders because managers need to be compensated for career risk. Career risk is especially significant if a manager's perceived ability is largely exposed to the labor market, as it is the case when the manager is asked to implement innovative strategies. Although lowering the quality of the information disclosed by the firm can mitigate a manager's career risk, it also hinders the manager's effort. This study theoretically examines shareholders decisions on innovative investments and information quality in the presence of managerial career concerns. I show that there is a tension between mitigating the career risk resulting from innovation and motivating managerial effort. I find that when the innovation urgency is intense, shareholders invest more in innovation and lower the information quality to protect the manager from career risk. In contrast, when the level of innovation urgency is low, shareholders invest less to mitigate the manager's career risk, while increasing the explicit incentive to motivate higher effort. My results provide possible explanations for mixed empirical findings on the relationship between career concerns and investment. Moreover, my results suggest that when we examine the impact of career concerns on investments in innovation, disclosure policy and managerial explicit incentives, we need to consider the innovation urgency. Since innovation urgency is also an industry-specific characteristic, my results also shed light on the aforementioned career concerns effects across industries. In addition, my results predict that experienced CEOs may not be favored by extremely innovative or least innovative firms as much as by middle-of-the-road innovation firms.

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