The impact of market competition on the relation between CEO power and firm innovation

This study empirically investigates the effect of market competition on the relation between CEO power and firm innovation by explicitly recognizing the endogeneity of CEO power. Results from instrumental variable (IV-GMM) regressions indicate that powerful CEOs produce more patents and citations relative to other CEOs. However, the relation between CEO power and innovation is driven by competition in product markets, as CEO power has a positive and significant effect on innovation only in high competition markets, and is not related to innovation in low competition markets. Overall, the results suggest that product market competition plays an important role in mitigating agency problems, and forces CEOs to use their power in the best interests of the shareholders.