CEO Incentives and Product Development Innovation: Insights from Trademarks

• In Event: Executive Compensation and Investment Activities

Abstract

We introduce trademark creation as a measure of product and marketing development innovation. We examine the relation between the structure of CEO incentives and product development innovation in a broad set of industries. We build a sample of over 112,000 USPTO trademark registrations by S&P 1500 firms from 1993 to 2011. The advantages of using trademarks over patents to measure innovation are the wider industry coverage and the ability to measure the development portion of innovation, i.e., the portion that results in goods and services for sale. We find that new product trademarks are associated with more volatile stock returns, sales, and earnings, controlling for current firm volatility and other firm characteristics, consistent with new trademarks being a useful measure of risky product development innovation. We find that the percentage of CEO pay in the form of stock options and the convexity of CEO incentives are strongly positively related to future new trademarks. Finally, we document a significantly positive relation between changes in stock option compensation around the implementation of SFAS 123(R) and subsequent changes in trademark creation, suggesting that stock option compensation is a significant driver of product development innovation.

Authors

• Lucile C Faurel, University of California, Irvine

• Qin Li, University of California, Irvine

• Devin M Shanthikumar, University of California, Irvine

• Siew Hong Teoh, University of California, Irvine