Balancing the Cognitive Highwire: The Effect of CEO – TMT Shared Cognition on Radical Innovation and Innovation Efficiency

ABSTRACT Radical innovation and innovation efficiency are important for a firm's competitive advantage. Past research has established that the firm's upper echelons disproportionately contribute to the radicalness and efficiency of innovation efforts. Relying on a social‐interactionism view of the CEO–TMT interface, we study the effects of CEO–TMT shared cognition in the form of subconscious cohesion and collective thinking, which is understood as relational adaptation at the group level on firms' attainment of radical innovation and innovation efficiency. We test our hypotheses on firms listed in the S&P 500 for at least three consecutive years between 2005 and 2018 and find that CEO–TMT shared cognition positively affects firms' pursuit of radical innovation, up to a certain point, at which shared cognition negatively affects firms' pursuit of radical innovation. We posit that the positive effect persists due to increasing CEO–TMT cohesion and concomitant confidence in pursuing high‐risk business endeavors. After a certain point, these positive effects are outweighed by the negative effect of groupthink, which limits divergent thinking and creativity. These effects differ for innovation efficiency, which increases linearly with CEO–TMT shared cognition and its effects on cohesion. Supplementary analyses on organizational slack further contextualize these findings. High‐discretion slack may dampen the benefits of cohesion and confidence, while low‐discretion slack appears to reinforce them. Our study develops the understanding of radical innovation and innovation efficiency, contributing to the literature on shared leadership at the CEO–TMT interface. It offers valuable insights for innovation decision‐makers, guiding them on the path to achieving breakthrough innovations and innovation efficiency.