E. Gordon Gee President at West Virginia University | Twitter Website
E. Gordon Gee President at West Virginia University | Twitter Website
West Virginia University researchers have found that the stock market influences CEOs' commitment to innovation through mechanisms such as compensation packages and feedback from financial analysts. According to Xinchun Wang, an associate professor at WVU's John Chambers College of Business and Economics, "The investment industry usually views financial analysts’ feedback, such as earnings forecasts, as impeding innovation because of the pressure the feedback puts on CEOs."
Wang explained that not all analyst feedback creates this pressure. "Stock recommendations actually foster explorative activities like research and development — investments that, although risky, can positively affect long-term returns." In their study published in the Journal of the Academy of Marketing Science, Wang and his co-author analyzed how analysts' stock recommendations impact CEO decisions by influencing investors and stock prices directly during interactions between management and analysts.
CEOs pay close attention to these recommendations. For instance, Goldman Sachs' advice to sell Imax stocks prompted Imax's CEO to innovate beyond traditional business models. Wang stated, “Financial analysts are information intermediaries between a firm and its investors... Compared with earnings forecasts... they’re based on long-term evaluations of future cash flows.”
Wang highlighted Adobe's transition under CEO Shantanu Narayen as an example of successful long-term strategy despite short-term revenue decline. However, many CEOs prioritize immediate returns over sustainability due to their compensation structures. In a separate study in the Journal of Product Innovation Management, Wang explored this link between strategic short-sightedness or "myopia" and executive pay.
He discovered that CEOs nearing stock option exercises might temporarily inflate stock prices by cutting R&D expenses. “Myopic CEOs prioritize short-term gains over long-term returns,” he said, noting past examples like WorldCom’s Bernard Ebbers who manipulated earnings for personal gain.
CEOs with significant power often feel less compelled to drive innovation due to fewer performance-based incentives in their compensation plans. A survey revealed 80% of executives admitted they would cut crucial spending to meet targets if incentivized by short-term success rewards.
Nevertheless, companies with strong innovation cultures can influence CEOs towards sustainable practices. "Boards of directors should mitigate that performance pressure by emphasizing... the importance of long-term innovation investments," concluded Wang.
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