Can directors' liability reduction promote corporate innovation?

Abstract

Purpose: This study aims to explore the effects of director liability reduction (DLR) laws on corporate innovation strategies in South Korea. Design/methodology/approach: Regression analysis is used to investigate the effects of the directors' liability reduction coverage on the corporate innovation. The data includes 7,517 firm-year observations spanning from 2011 to 2017. Findings: The authors provide empirical evidence that directors feel protected by the coverage and are able to focus more on innovative projects. Using research and development expenditure and the number of patents registered to measure the firm's innovation, we find that covered firms spend more on R&D and register more patents than non-covered firms. Originality/value: This study extends the literature on corporate innovation. A vast amount of literature empirically tests how best to motivate directors to engage in innovative activities. On the same line, this study is the first to empirically test the effect of DLR shelters on directors' motivations toward innovation.