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

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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.

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Authors and Affiliations

  1. University of New Brunswick-Fredericton, Fredericton, Canada

    I. A. Shaikh

  2. Rensselaer Polytechnic Institute, Troy, NY, USA

    L. Peters

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  1. I. A. Shaikh
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Correspondence to I. A. Shaikh.

Appendix: Robustness tests

Appendix: Robustness tests

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Shaikh, I.A., Peters, L. The value of board monitoring in promoting R&D: a test of agency-theory in the US context. J Manag Gov 22, 339–363 (2018). https://doi.org/10.1007/s10997-017-9390-8

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