This paper shows that CEO’s trust enhances innovation within firms, a novel micro-foundation for the well-known trust-growth relationship. I build a new matched CEO-firm-patent dataset covering 5,753 CEOs in 3,598 US public firms and 700,000 patents during 2000-2011. To identify CEO’s trust’s effect, I exploit variations in (i) generalized trust across CEOs’ ethnic origins, inferred from their last names using de-anonymized historical censuses, and (ii) CEOs’ bilateral trust towards inventors. Following CEO turnovers, a one standard deviation increase in CEO’s generalized trust is associated with 6% more future patents and 4-6% higher average patent quality. Changes in CEO’s bilateral trust towards inventors in different countries or from different ethnic origins have comparable effects on inventors’ patenting, controlling for CEO and other fixed effects. The effect is driven entirely by higher-quality patents, consistent with a model in which CEO’s trust incentivizes researchers to undertake high-risk explorative R&D. Furthermore, across and within firms, CEO’s generalized trust is associated with a text-analysis-based measure of firm’s trust culture computed from one million online employee reviews.
Ansprechpartnerin: Marina Chugunova
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