Do board reforms in parent firms boost subsidiaries’ innovation?

Abstract

Although corporate boards play an important role in innovation from a static perspective, little attention has been paid to the impact of board reforms in parent firms on subsidiaries' innovation from a dynamic perspective. Using a quasi-natural experiment on board reforms in central state-owned enterprises (CSOEs) in China, we establish the causal effect of board reforms in parent firms on subsidiaries' innovation. We find that the board reforms in parent firms significantly improve subsidiaries' innovation, which is more significant in enterprises with a higher degree of myopia, lower tolerance of failure, and stronger competitiveness. We also find that an increase in financing constraints and deteriorating corporate governance can positively moderate the policy effect of board reforms in CSOEs on subsidiaries’ innovation. Finally, we provide evidence that board reforms in parent firms enhance the value of subsidiaries.