Article ID Journal Published Year Pages File Type
5109320 Journal of Business Research 2018 10 Pages PDF
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.
Related Topics
Social Sciences and Humanities Business, Management and Accounting Business and International Management
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