The value of board monitoring in promoting R&D: a test of agency-theory in the US context

I. A. Shaikh () and L. Peters ()
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I. A. Shaikh: University of New Brunswick-Fredericton
L. Peters: Rensselaer Polytechnic Institute

Journal of Management & Governance, 2018, vol. 22, issue 2, No 5, 339-363

Abstract: Abstract Prior agency-theory research has presented conflicting findings regarding the importance of board monitoring in motivating R&D. We reinvestigate this literature by examining the value monitoring exerts in abating both the agency costs of underinvestment and overinvestment in R&D. We argue that monitoring that relies on board independence has both benefits and costs associated with promoting R&D. While we assert that intense monitoring by the board heightens underinvestment in the US context, it can also provide discipline over a firms free cash flows. We test our theory using a longitudinal panel data set consisting of a cross-section of S&P 1500 US-firms between 1997 and 2007. On average our study finds inside directors increase overinvestment in R&D, but facilitate better resource allocation when a firm has rich growth opportunities. Also, while too much emphasis on outside directors heightens underinvestment in R&D, a more independent board encourages better resource allocation when firms have high free cash flows that need to be paid back to owners. Thus, our results suggest a more inclusive perspective of agency-theory can help managers make better R&D investment decisions.

Keywords: Agency theory; R&D; Tobin’s-Q; Board monitoring; FCF’s (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s10997-017-9390-8

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