Corporate governance and R&D investment: the role of debt financing

Abstract

This paper examines the role of debt financing in the relationship between corporate governance and research and development (R&D) investment using a sample of publicly traded U.S. pharmaceutical firms from 2009 to 2018. The results show a positive and significant association between corporate governance mechanisms (such as board size, board independence, board gender diversity, and ownership concentration) and R&D investment and a negative and significant association between debt financing and R&D investment. In addition, we show that debt financing plays a moderating role and a partial mediating role in the relationship between corporate governance mechanisms and R&D investment. Specifically, debt financing attenuates the negative effect of board size on R&D investment and accentuates the positive effect of ownership concentration on R&D investment. Our study helps to shed light on a close and complex relationship existing between the firm’s choices of corporate governance, debt financing, and R&D investments, which the previous literature has so far examined in a partial and fragmented way. To ensure effective R&D investment, firms need to consider the effect of debt financing on corporate governance decisions.

Ownership concentration and R&D investment: the moderating role of stock options

“…Our arguments and findings make important theoretical contributions. First, previous research is rather ambiguous about the relationship between ownership concentration and R&D investment (Muhammad et al, 2022;Rong et al, 2017;Zeng and Lin, 2011), while this study empirically verifies the inverted U-shaped relationship between ownership concentration and R&D investment. This finding contributes to the intersection of research on ownership structure and strategy management by emphasizing the conditions in which two types of conflicts of interest occur in the formulation of corporate R&D investment strategies.…”

“…All Pearson correlation coefficients are smaller than the threshold value of 0.7. Moreover, a test for the variance inflation factor was performed (Muhammad et al, 2022). The results are shown in Table 2, yielding values less than 5 for all variables, which are within the normal acceptance range (Belsley, 1993).…”

“…The independent variable is ownership concentration. It is expressed as the percentage of shares held by the top three shareholders (Muhammad et al. , 2022).…”

“…By holding shares, large shareholders can influence executives' decisions. Previous empirical research suggested that ownership concentration significantly affects firms' R&D investments (Muhammad et al. , 2022; Rong et al.…”

Corporate governance and firm risk-taking: the moderating role of board gender diversity

“…Despite the theoretical arguments, some studies suggest that, due to managerial risk aversion, CEO duality can reduce firm risk-taking (Jensen and Meckling, 1976). For instance, the literature focusing on firm research and development (R&D) investments support the argument that managers are more reluctant to invest in long-term R&D projects, due to the uncertainty and risk they represent (Muhammad et al , 2021). Using a sample of large US firms, Kim and Buchanan (2008) show that CEO duality leads to lower corporate risk-taking, leading to managerial risk minimization.…”