Many studies in the literature discussing ways to improve productivity talk about engaging in research consortia (e.g., Dodgson, Mathews, & Kastelle, 2006) and increased collaboration between companies (e.g., Wolfe & Bramwell, 2008). Few studies discuss corporate governance as a mechanism for improving innovation. However this is an important area to examine. In this study we add to the research on the influence of corporate governance by examining the impact of corporate governance on the innovative success of a firm. Since studies on innovation have observed that the life cycle stage of a firm is important and should be factored in (e.g., Chiang, Lee, & Anandarajan, 2012), we also examine if this association is influenced by the stage of the firm in its respective life cycle. In essence, our study straddles two key areas: research involving the consequences and beneficial influence of corporate governance, and research examining how life cycle stage influences various dimensions of a firm's activity and performance. In the first category, the general conclusions from the research are that corporate governance, especially higher levels of governance: (1) has a positive impact on firm performance, (2) reduces the proclivity of managers to engage in earnings manipulation and (3) positively influences stock prices. In the second category, involving life cycle analysis, research shows that the stage of a firm in its life cycle influences the firm's structure with respect to overall firm performance. For instance, Anandarajan, Chiang, and Lee (2010) focused on examining how the R&D tax credit influences a firm's operating performance and the influence of the stage of the firm's life cycle on this association. They found first, that the R&D tax credit had a positive impact on operating performance; second, that the impact of the R&D tax credit on operating performance is accentuated when the firm is in the mature and declining stage of its life cycle; third, that the impact of the R&D tax credit is more pronounced for smaller relative to larger firms. The implication is that regulators should be aware that the tax credit has most impact for smaller firms and firms in the mature and declining stage. Similarly, Chiang et al. (2012) examining the influence of the R&D tax credit on investment in R&D, noted a positive association overall, but the effect was moderated by the firm's stage in its respective life cycle with the effect being most pronounced for firms in the stagnant stage.
In this study we examine how 'innovative success' is influenced by the level of corporate governance and whether the stage of the firm in its respective life cycle affects the association between innovative success and corporate governance.
Based on Mansfield (1981) we break down innovative success into three components, namely, technical success (as measured by an average number of patents received), commercial success (measured by a sales growth ratio) and economic success (measured by the Tobin's Q ratio). Overall, our results indicate that corporate governance positively influences technical success and economic success but does not significantly impact commercial success. That is, higher corporate governance has a positive impact on patent productivity and a firm's values. However, it does not influence sales growth. In essence the results indicate that while corporate governance per se does not appear to be associated with sales growth, it is positively associated with innovation and this information is appreciated by investors and incorporated in stock price. We also find that the stage of the firm in its respective life cycle does moderate this association. In particular, the influence of corporate governance on 'innovative' success is most beneficial in the stagnant stage and least influential when the firm is in the growth stage. Overall, our findings can assist managers understand how corporate governance can best help them get the most out of their innovative efforts taking the firm's life cycle stage into consideration.
Recent published studies evidence that corporate governance in the form of greater board independence has a positive effect on the innovative activity of a firm (Brown & Caylor, 2006; Tylecote & Ramirez, 2006) and firm performance (Bauer, Frijns, Otten, & Tourani-Rad, 2008; Sueyoshi, Goto, & Omi, 2009). Our study extends this line of literature. We add to the literature by demonstrating that these associations are not uniform and are contingent on a firm's respective stage in its life cycle.
The remainder of this paper proceeds as follows. The next section provides a review of the related literature and introduces the study's hypothesis. Research Design section presents the research method and the results and data analyses. Discussion of Results section discusses the study's major findings, and Conclusion section discusses our conclusions.
LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT
The literature review is dichotomized into two areas pertinent to our research. First, we examine studies examining the association of corporate governance and innovation. Second, since we postulate that the stage of the firm in its respective life cycle has a moderating influence on the association between corporate governance and innovation we bring in pertinent literature on life cycle influences.
Corporate governance and innovation
Shleifer and Vishny (1997) define corporate governance as the ways in which a corporation acts and procedures policies and practices it sets out to ensure that interested parties such as investors achieve a fair return on their investment. Much research has examined the association between corporate governance and firm value and financial performance. However, not much research has analyzed the effect of corporate governance on innovation. In this paper our focus is on how corporate governance influences innovation activity. The general theory is that corporate governance in the form of shareholder monitoring is effective at alleviating high agency and contracting costs associated with innovation. Prior research has examined various aspects of this association. For example, Francis and Smith (1995) examined how type of corporate ownership moderated the association between corporate governance and innovation. They surrogated the following variables for innovative success; namely, patent activity, growth by acquisition versus internal development and timing of long term investment activity. They found that firm ownership structure influenced innovation and diffusely held firms were less innovative. Chin, Chen, Kleinman, and Lee (2009) found that innovation as measured by patent quantity and quality was significantly and negatively related to level of agency problems. Their results show agency conflicts between controlling and other shareholders affect corporate innovation in Taiwan's electronics industry. They also identified that having controlling owners as either CEO or chair of the board of directors surrogated for impaired corporate governance and found that corporate innovation was lower for firms especially when a controlling owner served as either the CEO or the chair of the board of directors. The research method of Francis and Smith (1995) and Chin et al. (2009) used empirical data. In a study using a different methodology, namely interviews, Miozzo and Dewick (2002) explored factors that influence corporate governance. The interviewees comprised the largest contractors in five European countries. They concluded that, across countries, although corporate governance systems are broadly similar, differences in particular features such as firm ownership, financing, and organizational and management structures impact corporate governance. The 'take away' from the Miozzo and Dewick (2002) study pertinent to our research is that even sound systems of corporate governance can be influenced by extraneous features such as those described. Hence, corporate governance could also be influenced by an extraneous feature such as the stage of the firm in its respective life cycle. This is discussed next.
The influence of life cycle stage on management control dimensions
Auzair and Langfield-Smith (2005) point out that the life cycle stage has not been linked to most of the management control dimensions. Since life cycle does impact various aspects of management control dimensions, they note that this is an important area to consider in management accounting research. In addition, prior research also examined the relationship between each life cycle stage of a firm and its moderating effects on various aspects of a firm's structure and performance (Anandarajan, Chin, Chi, & Lee, 2007; Davila, 2005; Kallunki & Silvola, 2008; Miller & Friesen, 1984).
Miller and Friesen (1984) in one of the seminal papers in this area suggest that the characteristics of a firm could change based on the stage of the firm in its respective life cycle. Miller and Friesen (1984) characterize the stages of a firm as firstly birth and growth, secondly maturity and finally, a stagnant stage. In the growth stage firms are characterized by rapid growth and technological innovation. The firm during this stage has rapid sales growth and the strategy is oriented toward broadening of products and markets and innovation in product lines. In the maturity stage, Kallunki and Silvola (2008) and Miller and Friesen (1984) note that sales levels stabilize and the level of innovation falls. Kallunki and Silvola (2008) note that the firm can then subsequently drift into the stagnant stage, or alternatively enter a revival stage and then drift into a stagnant stage. In the stagnant stage the firm is characterized by low sales growth. In addition, Granlund and Taipaleenmaki (2005) also examined the two way relationship between life cycle stage and management control developments. They conclude that management control development is...