Executive pay bandwagon and corporate innovation

Abstract

Based on social comparison theory and principal-agent theory, we examine the influence of the executive pay comparing mentality (i.e., pay bandwagon) on corporate innovation. Our findings suggest that a greater propensity of the executive pay bandwagon is associated with lower level of corporate research and development spending, and fewer high-quality patents, leading to a lower level of total factor productivity. Additionally, our analysis shows that executives with a strong comparing mentality exhibit less risk-taking but more myopic behaviors, thereby reducing their incentive to engage in innovation. We further find that corporate governance has moderating effects on the relationship between the executive pay bandwagon and corporate innovation. Overall, we find that executive pay bandwagon triggered by external pay inequality is a type of intrinsic motivation that affects firms’ innovation strategy and innovation efficiency.