Employee incentives and energy firms’ innovation: Evidence from China

Abstract

This study investigates the effects of non-executive employee stock ownership plans (ESOPs) on energy firms’ innovation. Based on 248 Chinese energy companies covered by the State Intellectual Property Office (SIPO) database from 2006 to 2018, we document that non-executive ESOPs have a significantly positive impact on the number of patents applied by energy companies. To alleviate the endogeneity concerns, we adopt the two-way fixed effects model, the system generalized method of moments (SYS-GMM), and the instrumental variable approach to identify the causal relationship. Furthermore, our analysis reveals that non-executive ESOPs foster patent applications through risk-taking incentives implied by options, rather than the performance-based incentives. In addition, the positive effect is particularly pronounced in non-state-owned enterprises, companies with higher R&D intensity, and companies with less free-riding. Our results highlight the importance of rank-and-file employee incentives for the technological innovation of Chinese energy companies, and provide clear policy implications to manages and regulators to design appropriate incentive schemes for employees to promote corporate innovation.