Financial Constraints and R&D Investment: The Moderating Role of CEO Characteristics

Abstract

How CEOs with different characteristics act differently on R&D investment under the condition of financial constraints is an important but understudied question towards firms’ sustainable innovation. Employing the dataset from China-Enterprise Survey 2012 of the World Bank, this study tests the impact of financial constraints on firms’ R&D investment and the moderating role of CEO characteristics. Empirical results show that: (1) firm’s financial constraints have a significant restricting effect on their R&D investment; (2) internal financial constraints have no significant restricting effect on R&D investment for firms with female CEOs in comparison with firms with male CEOs, while the external financial constraints have a significant restricting effect on R&D investment for both groups. (3) CEO experience has a non-linear moderating effect on the relationship between financial constraints and a firm’s R&D investment. When the accumulated experience is overloaded, the positive moderating effect of CEO experience begins to decline and even become negative. Robustness tests further confirm these empirical findings. This study directly contributes to the literature of financing innovation and top management team’s impact on firms’ sustainable innovation, and generates insights on firms’ R&D management under the condition of financial constraints.

The effect of CEO regulatory focus on changes to investments in R&D

“…Each CEO has a unique motivational orientation that can be better understood through regulatory focus theory. This insight, combined with the findings of previous studies that have considered the influence of other individual characteristics on R&D spending (i.e., Barker & Mueller, 2002; Cheng, 2004; Serfling, 2014; Yin et al, 2019; Yunlu & Murphy, 2012), suggests the importance of boards recognizing individual differences in CEOs when setting executive compensation packages. In part, applying the same compensation practices for two people with different regulatory foci may have unique and potentially unintended consequences.…”

“…CEO characteristics, in particular, have been a focal consideration when examining R&D spending (Barker & Mueller, 2002) because of CEOs’ prominent influence on strategy (Finkelstein et al, 2009). In turn, prior research has examined several surface‐level CEO characteristics—including age, gender, educational background, and tenure—to predict R&D spending (Barker & Mueller, 2002; Cheng, 2004; Serfling, 2014; Yin et al, 2019; Yunlu & Murphy, 2012).…”

Postgraduate Education of Board Members and R&D Investment—Evidence from China

“…For example, the following studies identified that directors' gender affected the firm's R&D investment. Despite the common sense that women tend to be risk-averted, researchers have found that female directors in the boardroom actually invest more in R&D activities compared with their male counterparts [25][26][27]. Age is another determinant.…”

The Effects of Patents on the Relationship between R&D Activities and Business Management Performance: Focus on South Korean Venture Companies

“…The analysis conducted by Cheung et al on SMEs demonstrated that R&D collaboration has a positive effect on technical performance, emphasizing the importance of industry-academic collaboration for SMEs [18]. As such, R&D collaboration is recognized as a key strategy for acquiring important external knowledge (technology) [19].…”