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Inside directors and the underinvestment of financial slack towards R&D-intensity in high-technology firms

Ibrahim A. Shaikh, O'Brien, Jonathan Paul and Lois Peters

Journal of Business Research, 2018, vol. 82, issue C, 192-201

Abstract: Agency theory emphasizes the role of outside directors in mitigating free cash flow (FCF) problems, such as overinvesting FCF's into negative NPV R&D projects. In this paper we draw on and extend agency theory to argue that the underinvestment of financial slack towards a persistently high R&D-intensity is actually a greater problem for high-tech firms. Specifically, we claim that inside directors play a critical role for the board in safeguarding R&D investment by monitoring the CEO, and mitigating informational asymmetries for independent directors. We test our theory using a panel-data set of S&P 1500 firms in R&D-intensive industries from 1997 to 2007. Our empirical analysis reveals that inside directors positively influence the relationship between financial slack and R&D-intensity, and that their ability to ensure cash holdings are used to preserve R&D matters the most during periods of financial distress.

Keywords: Agency theory; Distress; Financial slack; Inside directors; R&D-intensity; Underinvestment (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jbrese:v:82:y:2018:i:c:p:192-201