Asian Review of Financial Research Vol.34 No.3 pp.93-124 https://www.doi.org/10.37197/ARFR.2021.34.3.4
The Study on Corporate Governance and Innovation : Evidence from Korean Patent
Key Words : Corporate governance, Corporate innovation, R&D, Patent, Citation received
This study analyses the effect of corporate governance on corporate innovation. Specifically, I investigate firms that are given corporate governance scores from the Korea Corporate Governance Service (KCGS) in the Korean market from 2005 to 2016. These governance scores have four categories: shareholders' rights, board of directors, market disclosure, and auditing body. For the purposes of this study, I primarily consider the total governance score, which is the comprehensive index of a firm's governance status. In addition, the corporate innovation output is measured by R&D expenditures, the total number of granted patents, and the total number of citations received. R&D activity, in general, is a long-term investment that causes uncertainty and information asymmetry. It also generates an agency problem, which is a conflict of interest between shareholders and managers (Miozzo and Dewick, 2002; Finkelstein and Boyd, 1998; Coff, 2003). While shareholders prefer R&D investment to pursue the long-term growth and profit of their firm, managers are more likely to prefer short-term investments. As corporate governance aligns the interests of managers and shareholders, governance can positively affect to corporate innovation. Therefore, the hypothesis in this study is that a firm with good governance is likely to demonstrate high innovation (R&D, grated patent, forward citation). Previous studies mainly focus on the relationship between corporate governance and R&D investments, while demonstrating a positive relationship between governance score and R&D investment (Kim, 2003; Kim, 2015; Kim and Lee, 2012; Lee and Cho, 2001). However, there are a few studies that show the relationship between corporate governance and patents. Seok (2018) reports that firms with a high governance score hold more patents using KOSPI firms from 2011 to 2016. He, however, analyzes the total number of granted patents, which represents the quantity of innovative activities. Like Seok (2018), Choi, Chung, and Wang (2020) examine the effect of governance quality on firm innovation using the total number of granted patents. In this study, I analyze forward citations, which represent the quality of corporate innovation, in addition to granted patents. The crucial contribution of this study is the use of a novel innovation measurement. Unlike, in the US, Korean patent information has not been consolidated in a single database. Since researchers need to hand-collect patent data, previous studies have only analyzed data for short periods or specific industries. Moreover, most research on this topic in Korea uses the total number of granted patents each year to measure firm innovation. To overcome this limitation, I retrieve patent data using a Python program from KIPRISplus (Korea Intellectual Property Rights Information Service), which is a patent information service providing real-time access to KIPO's database with Open API. This allows for the use of forward citation information in order to investigate the quality of the patent. Thus, I extend the prior literature by examining both the quality and quantity of innovative activities using various measurements. The main findings are as follows. I find a positive association between a firm's governance score and the level of corporate innovation. Firms that have a higher governance score spend more on R&D, which is consistent with the previous literature. Additionally, firms with a strong governance score are likely to grant more patents than firms with weak governance. Moreover, I introduce forward citations as a measure of the quality of innovation, which is calculated by the total number of citations received in subsequent years. The result indicates a positive association between governance score and forward citations. Firms with a strong governance index tend to achieve highly-cited patents. There also exists a significant difference in the coefficient estimates between granted patents and forward citations. These results are robust when compared to alternative approaches. Governance and innovation activities are likely endogenously determined. To alleviate this endogeneity problem, I use the t-1 value for the governance score as well as the two-year sum from t+1 to t+2 for innovation variables, which allow me to find qualitatively similar results. Next, I employ 2SLS analysis with instrument variables. The listed firms, with over two trillion won of total assets, have an obligation regarding the appointment of an outside director, auditor, and audit committee. Thus, this method can be an appropriate instrument to eliminate endogeneity between governance and innovation (Ko, Baik, and Ahn, 2012; Kim and Eum, 2008; Sohn, 2010). In summary, all the results imply that corporate governance is an important factor for explaining corporate innovation activities, especially forward citations.