International Corporate Governance and R&D Investment

Gang Xiao
2011 Social Science Research Network  
In this paper I show that shareholder protection significantly influences the efficiency of firm investment in Research and Development (R&D) projects. Shareholder protection protects the benefits of outside shareholders and disciplines managerial behavior and so that it may reduce investment distortions. Using a sample of 60,901 observations from 45 countries during 1993-2008, I find that (1) shareholder protection is significantly and positively (negatively) correlated with R&D investment of
more » ... R&D investment of firms that are likely to underinvest (overinvest). If shareholder protection is increased from the weakest to the strongest, R&D expense to book assets ratio of firms that may underinvest will increase by 2.6% ∼ 6.3%, while this ratio will decrease by 1.1% ∼ 2.3% for firms that are likely to overinvest; (2) For both firms that may underinvestment or overinvest, R&D investment sensitivity to free cash flow is lower when shareholders' benefits are better protected; (3) shareholder protection significantly increases sensitivity of R&D investment to Tobin's Q for firms that may underinvest, but this effect does not exist among firms that are likely to overinvest; and (4) Disclosure has larger effect on R&D investment than the other aspects of shareholder protection do. Overall, this study contributes to the international corporate governance literature and highlights the importance of shareholder protection in improving the efficiency of firm investment in R&D projects. JEL Classification Codes: G15, G31
doi:10.2139/ssrn.1787137 fatcat:xmi2nei66naufnezydqjwdzb4y