Direct and Indirect Effects of Board Characteristics on R&D Investment

• In Event: Management, Etc.

Abstract

Corporate behaviors are affected by the decision horizon of managers i.e. whether managers are interested relatively more in maximizing short-term annual performance or more in creating long-term shareholder values. To mitigate the agency problem, shareholders use both executive compensation and other corporate governance mechanisms while executive compensation structure is affected by corporate governance. Focusing on the interrelation between corporate governance, executive compensation, and managerial decision horizon, we examine how board characteristics affect corporate R&D investment directly and indirectly through executive compensation. Based on a sample of 7,639 firm-year observations from 1999 to 2011 for firms in the S&P 1500 index, we find that board independence, CEO-chairman separation, and board ownership affect firms’ R&D investment not only directly but also indirectly, and that the indirect effect is substantially high for certain board characteristics.

Authors

• Rajiv D Banker, Temple University

• Byunghoon Jin, Marist College