Inventor CEOs and Success of Technology Firms

09 Jan 2021

An increasing number of highly successful companies in the world are led by chief executive officers (CEOs) that have hands-on innovation experience as inventors. In January 2020, the combined market value of such firms exceeded 25% of the total market capitalization of New York Stock Exchange (NYSE). The examples include Elon Musk of Tesla, Jeffrey P. Bezos of Amazon, Lawrence Edward Page and Sergey Brin of Google, Theodore W. Waitt of Gateway, Steven A. Ballmer of Microsoft, and Lawrence J. Ellison of Oracle, among many others. Is the increasing prevalence of inventor CEOs merely by chance? Or is there something special about these CEOs’ hands-on involvement in innovation that allows them to contribute to the success of their firms? In two recent papers, Dr Ibrahim Bostan and Professor G. Mujtaba Mian set out to answer these questions and explore the causal effect of inventor CEOs in the success of their firms.

In the first paper published in International Review of Finance in 2019, they focus on large listed firms in the US and examine the effect of inventor CEOs on firm innovation. They put together a rich dataset that classifies a CEO as inventor if there is at least one patent registered in his or her name. They find that firms with inventor CEOs indeed generate greater volume of registered patents, produce more highly cited patents, and are more likely to spur ground-breaking or disruptive innovations as measured by the future impact of the patents. These results are obtained in models with firm fixed effects, in difference-in-difference analysis of transitioning CEOs that controls for the CEO fixed effects, and among firms with founder CEOs. The findings support the idea that CEOs’ inventor experience endow them with valuable innovation-related insights that translate into a superior ability to evaluate, select, and execute innovation-intensive investment projects for the firms they lead. A competing paper published in Journal of Financial Economics in 2020 by Imdad Islam and Jason Zein, two researchers from Australia, arrive at similar conclusions.

In their second paper, Dr Ibrahim Bostan and Professor Mujtaba Mian focus on young start-up technology firms that successfully complete their initial public offering (IPO) and get listed on the stock exchange. Such transition to a publicly listed company typically represents a major milestone and a transformative experience in the life of a firm. The question Bostan and Mian ask is whether having an inventor CEOs at the helm helps or hinders firms in making this transition. Their analyses uncover several interesting relationships. Inventor-led firms make the transition to a public entity at a younger age, with a smaller size and while being less profitable. This suggests that the personal hands-on experience allows CEOs of these firms to better evaluate the value of their firm’s innovation and more effectively communicate it to external investors. This is also evident from such firms having less ‘underpricing’ at the time of their IPO. Underpricing is defined as the difference between the offer price of shares and the price on the first day of trading, and is commonly viewed as a ‘discount’ that needs to be offered to investors to persuade them to invest in risky firms. During the three periods after the IPO, inventor-led firms generate superior innovation, as evidenced by greater volume of patents and more valuable patents. This indicates that inventor CEOs are better at managing firm’s innovation around the time of transition, especially in channeling the new cash to its most productive uses that comes in at the time of IPO. Finally, inventor-led IPOs also experience superior stock returns in the three-year period following the IPO benefiting their investors.

The findings have important implications for the UAE. Innovation is key to the long-term competitiveness of an economy. It is acknowledged as a key pillar of the country’s future knowledge-based economy in UAE Vision 2021. The research by Dr Bostan and Professor Mian identifies a key success factor—the personal hands-on involvement of the CEO in innovation—that the UAE listed firms can leverage upon to spur innovation. The lesson for the local young start-up technology firms is that they need to consider having inventor CEOs at the helm as this can make it easier for them to raise external finance and negotiate better terms with external financiers. This is very important, as lack of external finance has often been cited as a major constraint for the growth of young innovative firms (owing to the greater uncertainty surrounding such firms). In addition, the presence of inventor CEO would also benefit the technology start-up firms in UAE in terms of managing their innovation and stock returns around the time  of their transition to a public entity. These lessons can come in handy for innovation-oriented firms in the UAE as they seek to fulfill the country’s ambition of excellence in innovation.