"Ownership Transition, Managerial Short-Termism, and Exploratory vs Exploitative Innovation Strategy"

We examine the effect of transition from private to public ownership via initial public offerings (IPOs) on firms’ choices between exploratory and exploitative innovation strategy. We argue that, due to managerial short-termism associated with public equity market, newly public firms are more (less) likely to adopt exploitative (exploratory) innovation strategy. We also examine how this relation is moderated by the presence of insider sales, the threat of hostile takeovers, and the presence of transient institutional investors, all of which exacerbate managerial short-termism. We find strong support for our theory based on a sample of 291 IPO firms and their matched private firms over the period 1997-2008 and difference-in-differences analyses. We discuss our paper’s contribution to research on exploratory versus exploitative innovation and on corporate governance.