Managerial Political Preferences and Corporate Innovation Strategies

ABSTRACT

This paper investigates how managerial personal political preferences shape firm innovation strategies. Using a text‐based methodology, we classify firm innovations as less risky process innovations and riskier, long‐term product innovations. We find that firms led by Republican‐leaning managers in the US tend to engage more in process innovations than product innovations. We further show that firms led by Republican‐leaning managers are myopic in investment horizons and conservative in financing policies, thereby exhibiting a stronger preference for process innovations. Additionally, managerial discretion, afforded by stronger ideological alignment between managers and the board, longer executive tenures, and higher executive compensation, enables Republican‐leaning managers to better act on their own political preferences, resulting in more firm process innovation outcomes. Finally, the effects of managerial political preferences on process innovations are more pronounced for firms with higher labour costs.