Modelling the relationships of internal governance mechanisms on innovation: empirical insight from utility tokens

Abstract

The purpose of this paper is to determine the impact internal corporate governance mechanisms have on innovation. Current studies are inconclusive on the conceptual relationship given the wide range of institutions that influence corporate governance in countries around the world. This paper examines the impact of ownership structure and advisory board structure on innovation output in the context of utility tokens, which is an idyllic setting as there are no notable regulations that apply to utility token offerings as contracts are enforced through smart contracts, on blockchain, thus serving as a fruitful laboratory for exploring the conceptual relationships. The analyses were conducted on 525 utility tokens, which held their initial offerings within a period of three years. Several linear regressions were conducted, with the natural logarithm of pull requests merged on GitHub files as the dependent variable, representing innovation output. The percentage of token supply owned by whales represented ownership concentration, the number of institutional owners represented institutional ownership and advisory boards size and technical intensity represented advisory board structure. To test potential quadratic relationships, the squared terms of each independent variable was also considered. Findings suggest that ownership concentration, represented by the percentage owned by whales, has a quadratic, inverse-U relationship on innovation output, which may reconcile the positive and negative linear findings from prior research. Institutional ownership had a strong, positive relationship on innovation output. In this context, institutions were all venture capital firms and this advances knowledge as venture capital firms have not been isolated from other institutional investors in prior research due to difficulty with access to data. The findings also cemented predictions for advisory board structure, namely that the technical intensity of the advisory board explained more variance for innovation outcomes than the raw number of advisors. This is the first study to empirically examine advisory boards of organizations. The main contribution of this research is the modelling of conceptual relationships between governance and innovation in a context without much formal institutional forces influencing governance, and the testing of quadratic instead of strictly linear relationships. This research concludes with discussions of its limitations, implications for governance regulatory bodies and investors and methodological contributions on using the utility token environment as a laboratory for testing governance relationships.