Do Venture Capital-Driven Top Management Changes Enhance Corporate Innovation in Private Firms? - Dissertation Executive Summary

Abstract

Using hand-collected data on top management changes in venture capital (VC)-backed private firms, I show that VC-driven top management changes are associated with significantly more and higher quality innovation. Further, the effect of VC-driven top management changes on innovation is stronger for firms with greater VC power. An instrumental variable analysis using an exogenous shock to the supply of outside managers available for hire shows that the above relations are causal. Making use of hand-collected information on the founders of private firms, I find that both founder replacements and non-founder top management changes have a positive effect on corporate innovation. Decomposing top management changes into different types, I show that replacing top managers with new ones (rather than adding or removing managers alone) is most effective in enhancing innovation. Delving deeper into the educational background and employment history of the top management team, I find that adding seasoned CEOs has a significantly positive effect on innovation, while changing senior managers with a prior technical background does not. I also analyze the possible mechanisms through which top management changes affect corporate innovation, and establish that one such mechanism is through new management teams hiring a greater number of inventors for a given investment size. Finally, I find that VC-driven top management changes increase the probability of a firm's successful exit (via an IPO or an acquisition), partially driven by their enhanced innovation.