Do Venture Capital-Driven Top Management Changes Enhance Corporate Innovation in Private Firms?

Using a hand-collected dataset on top management teams in venture capital-backed private firms, I analyze the effect of top management changes on subsequent corporate innovation in these firms. I find that top management changes are associated with significantly more and higher quality corporate innovation, as measured by patent counts and patent citations, respectively. I show that top management changes in these firms are likely to be venture-driven and that the effect of top management changes on corporate innovation is stronger for firms in which venture capitalists have greater power. An instrumental variable analysis using a plausibly exogenous shock to the supply of outside managers available for hire implies a positive causal effect of top management changes on corporate innovation. Further, I find that adding new managers has a significantly positive effect on innovation, while removing existing managers does not. Delving deeper into the educational background and employment history of each new manager added to the management team, I find that adding seasoned CEOs has a significantly positive effect on innovation, while adding senior managers with a prior technical background does not. I also analyze the possible mechanisms through which top management changes affect corporate innovation, and establish that one such mechanism is through new management teams hiring a greater number of inventors for a given investment size. Finally, I find that both top management changes and corporate innovation output have a positive impact on the probability of a successful exit (IPO/acquisition).