Trust and Innovation Within the Firm: Evidence from Matched CEO-Firm Data

Abstract This paper shows that CEO’s trust enhances innovation within firms, providing 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. I exploit variations in generalized trust across CEOs’ ethnic origins, inferred from their last names using de-anonymized historical censuses. 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, driven entirely by higher-quality patents. Text analysis of employee reviews shows that CEO’s trust enhances a firm’s trust culture. These results are consistent with insights from qualitative interviews suggesting that CEO’s trust and firm’s trust culture encourage researchers to undertake high-risk explorative R&D. In addition, changes in CEO’s bilateral trust toward inventors in different countries have comparable effects on inventors’ patenting, controlling for CEO and other fixed effects.