Research and development, cash flow, agency and governance: UK large companies

Abstract

ABSTRACT

Corporate governance practices and companies’ R&D intensity: Evidence from European countries

“…On the one hand, the predictions of standard agency theory assume that the adoption of governance practices that align managers' decisions to shareholders' interests should be associated with a higher level of R&D intensity. On the other hand, the predictions of a different perspective in the literature emphasize the importance of managerial security and autonomy for sustaining risky R&D projects, and contrast these with the short-term pressures from shareholders (Carpenter et al, 2003;Driver and Coelho Guedes, 2012;Lazonick and O'sullivan, 2000). This latter stream of the literature posits a negative effect by the abovementioned practices on R&D, as suggested by our hypotheses.…”

“…the ECJRCIPTS, 2007a), it is important to understand how these firms' governance influences their R&D spending. A growing stream of empirical research has assessed the effect of corporate governance practices on innovation, particularly focusing on what concerns firms' R&D intensity levels (Lee and O'Neil, 2003;Munari et al, 2010;Aghion et al, 2009;Driver and Coelho Guedes, 2012).…”

“…Initial empirical contributions have analysed the impact on R&D intensity of the degree of ownership concentration (Lee and O'Neil, 2003;Tribo et al, 2007), owner identity (Hoskisson et al, 2002;Kim et al, 2008;Munari et al, 2010) or the role and composition of the board of directors (Kor, 2006). More recent contributions have investigated the role of corporate governance practices, such as compensation schemes for CEOs, managers and directors (Barker and Mueller, 2002;Coles et al, 2006;Hoskisson et al, 2002), power separation between managers and board members (Driver and Coelho Guedes, 2012), and annual shareholders' meeting rules (Lhuillery, 2011). The advantage of these later constructs is that they reflect actual practices that have been designed and carried out within companies rather than board or shareholder compositions that might exist for historical reasons.…”

“…The advantage of these later constructs is that they reflect actual practices that have been designed and carried out within companies rather than board or shareholder compositions that might exist for historical reasons. This research trend has shown mixed results with a few of these relationships between corporate governance practices and R&D intensity turning out to be negative (Lhuillery, 2011;Driver and Coelho Guedes, 2012).…”

UK evidence for the determinants of R&D intensity from a panel fsQCA

“…The final sample comprises 1387 firm-year observations, corresponding to an unbalanced panel of 302 firms. The firms are from the following industrial subsectors according to their 3-digit Cohen and Levinthal (1989) and Driver and Guedes (2012), the search intensity corresponds to the R&D intensity, which is equal to the ratio of R&D to sales. The sample uses only firms that have an R&D intensity less than or equal to one (following Chen & Miller, 2007), because the underlying arguments apply to those firms that engage in continuous production and sales, not for those that are strictly R&D specialists.…”