Internal governance and innovation

Internal governance is the monitoring of a CEO by immediate subordinate executives with different career horizons. In this paper, we examine the role of internal governance on corporate innovation. Conducting a study of privately owned firms listed in China, we find that internal governance significantly increases firms’ innovation investment, but we uncover little evidence that it affects innovation quality as indicated by patents. We further discuss that a possible channel for increased innovation investment is enhanced decision‐making quality. Regarding the quality of innovation, executives’ knowledge plays a larger role than internal governance. In sum, this study provides evidence about the innovation consequences of internal governance in China’s weak internal governance culture.