Who promotes firm innovation more: outside or inside political successor?

Abstract

ABSTRACT Whereas researchers have demonstrated the relevance of politician turnover for firm innovation, the role of successor origin has remained elusive. This paper compares internally and externally appointed political successors and investigates which types of succession foster more firm innovation. Using a sample of manufacturing firms experiencing political succession events between 2005 and 2010 in China, we find that firms experiencing outside political succession conduct fewer R&D activities than those undergoing inside political succession. Furthermore, we find that factors aggregating information asymmetry (i.e. abnormal departure of the predecessor) augment the above negative relationship, while those weakening information asymmetry (i.e. successor-related information) alleviate it. Our findings support the information asymmetry theory’s prediction that outside succession introduces greater information asymmetry regarding the consistency of the political environment than inside succession, thus decreasing firm innovation. This study contributes to the politician turnover literature by highlighting the influence of successor origin on firm innovation.