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The Journal of International Management Studies, Volume 7 Number 1, April, 2012 41
Moderating Effects of Board and Managerial Incentive on the
Relationship between R&D Investment and Firm Performance-
Evidence from Listed Manufacturing Firms in China
Dr. Haiyun Ren, Associate professor of College of Economics and Management,
Northwest A&F University, China
Dr. Krishnamurti Chandrasekar, Professor of School of Management, New York Institute of Technology,
New York, USA
Dr. Bin Li, School of Finance and Economics, Xi'an Jiao tong University, China
ABSTRACT
Several studies based on US and UK data have tested the moderating effects of corporate governance on R&D
investment and firm performance .However, there have been no investigations for China, in part because of data
unavailability and the complicated analysis involved. In this paper we take a first step towards filling this gap using a
hand collected R&D data of Chinese listed manufacturing firms. We demonstrated how board of director and
managerial ownership influence the relationship between R&D and firm performance. Based on Chinese listed
manufacturing firm’s data, we examine the moderating effects of board of directors and managerial stock ownership on
the relationship between R&D spending and firm performance by hierarchical regression and subgroup analysis.
Results show that board size has no moderating effect on the R&D-firm performance relationship, while this
relationship is negatively associated with board stock ownership, frequency of board meeting and managerial stock
ownership.
Keywords: R&D; Firm performance; Board of director; Managerial incentive
INTRODUCTION
The characteristics of R&D activities(high-risk, cross-period income and serious asymmetry information)
induce particularly serious agency problem. Appropriate corporate governance mechanisms can reduce information
asymmetry and control manager's opportunistic behavior, which may influence corporate R&D decision-making
(Jensen and Meckling, 1976). For this reason, both academics and practitioners have paid high attention on the
relationship between corporate governance and R&D activities. The early studies have mainly concerned with the
influence of corporate governance on R&D input and more recently scholars have realized corporate governance not
only affects R&D intensity but also controls managers’ opportunistic behavior causing managers allocate resources
more efficiently, which in turn influences the outcome of R&D project and corporate performance. Thus corporate
governance has been introduced as a moderating variable of R&D input and corporate performance. However, to the
best of our knowledge the more recent studies were mainly based on firm data in the US and UK. So far, there has been
no investigation of Chinese data, in part because of data availability issues. In this paper we take a first step towards
filling the data gap using a hand collected R&D data of Chinese listed manufacturing firms. In the emerging economies,
the concentration of ownership-a common agency solution- would not work because giving more control to an already
powerful controlling shareholders group may further enhance their prospect of expropriation (Dharwadkar et al., 2000).
So, we mainly examine the moderating effect of board and management ownership on the relationship between R&D
and firm performance in this paper. Our empirical results indicate that board size has no moderating effect on the R&D
spending-performance relationship, while board meeting, board stock ownership and managerial stock ownership have
negative association. We draw the conclusion that the boards of Chinese companies probably have a passive role in
corporate governance. Besides, owing to high risk and cross-period income in R&D investment, stock ownership
incentive is not likely to raise R&D expenditure.
The Journal of International Management Studies, Volume 7, Number 1, April, 2012 42
The rest of the paper is organized as follows. In section 2 we develop testable hypotheses. Section 3 describes the
sample and summary statistics. In section 4, we report the empirical findings and provide concluding remarks in Section
5.
HYPOTHESES DEVELOPMENT
The purpose of R&D investment is to improve the firm’s performance. However R&D expenditures per se do not
automatically lead to better firm performance because those expenditures may not be effectively and profitably used.
Firm’s performance depends critically on how effectively and profitably the R&D expenditures are used, rather than the
amount of R&D investment per se1. Agency theory (Jensen and Meckling, 1976; Byrd et al. 1998) propagates that due
to separation in ownership and management, there is non-alignment of interests between principal (owner) and agents
(managers).The separation of ownership and control in large publicly owned firms has induced potential conflicts
between the interests of professional managers and stockholders (Berle and Means, 1932).Stockholders are interested in
maximizing the long-term profitability of a firm and the value of their investments, while manager's objectives when
running a company's business may also include assuring personal wealth, job security, and prestige. Thus the divergence
of manager's and stockholders' objectives may lead to acute conflicts of interest in decision making and implementation
regarding the strategic orientation of the firm. One strategy that is subject to acute manager-stockholder conflict of
interest is the firm's corporate R&D strategy.
The character of R&D activities makes agency costs particularly severe. First, they are inherently risky as they
provide greater variability of outcomes and greater probability of failure despite the best effort of managers (Baysinger
et al., 1991). Second, R&D activities require long-term investments in projects that may have a negative impact on
more immediate performance (Hoskisson et al., 1993). Consequently, risk-averse managers may be reluctant to invest in
risky long-term R&D projects. Third, the extent of information asymmetry associated with R&D is larger than that
associated with tangible (e.g., property, plant, and equipment) and financial investments because of the relative
uniqueness of R&D and the managers may exploit this asymmetry to gain from insider trading (Aboody and Lev, 2000).
Fourth, managers are more likely to hide information in R&D activities (Zenger,1994). As we know R&D project is a
kind of knowledge investment activity, which is comparatively complicated (Jensen et al.,1992). As insiders,
managers may have the personal knowledge and understand the expected obstacle of R&D projects. If managers
perceive the negative effects of R&D expenditure such as potential risk and loss, then they will refrain from pursuing
R&D investment. They may not even report the issues. On the other hand, even if manager’s own information is
positive about investing in R&D, but in a climate of lack of economic incentives, managers may very well hide the
critical knowledge and technology. Moreover, accounting measurement and reporting rules treat R&D differently from
other physical assets and R&D is immediately expensed in financial statements, so that no information on value and
productivity changes arising from of R&D input is reported to investor (Aboody and Lev, 2000). Together, these
characteristics can stimulate managerial opportunistic behavior; aggravate agency costs through non initiation or failure
of R&D projects and ultimately influencing the firm performance. So, the agency problem in R&D activities not only
influences the input of R&D but also affect the impact of the effects of R&D implementation.
Agency theory predicts that proper corporate governance mechanisms can reduce agency problems and may help
to ensure appropriate level of R&D investment since they curtail managers’ propensity to pursue inefficient strategies
(Jensen and Meckling, 1976). Moreover, proper corporate governance mechanisms can reduce information asymmetry,
supervise the managers, and control managerial opportunistic behavior, thus ensuring that the R&D activities are
performed according to the general understanding of maximizing shareholder interest (Hill and Snell, 1988; Wright et
al., 2002).In sum, corporate governance may affects the R&D input and R&D output . The relationship between R&D
1 Although some studies (e.g. Griliches ,1980, 1985,1986 ; Hall, Mairesse,1995; Wakelin ,2001)based on the C-D production function found R&D
investment had positive effect on firm productivity, the contribution rate is different. Some other studies (e.g. Hirschey ,1982;
Connolly ,Hirschey ,1984; Hirschey ,Weygandt ,1985; Hall ,1993; Johnson ,Pazderka,1993; Lev ,Sougiannis , 1996; Chan, et.al.,2001) examined
the relationship between R&D investment and firm’s market value. However, the conclusions are mixed.
The Journal of International Management Studies, Volume 7 Number 1, April, 2012 43
input and firm performance varies according to the corporate governance environment. Thus corporate governance has
been introduced as moderating variable of R&D input and corporate performance naturally. Empirical evidence is
consistent with the R&D-firm performance relation moderated by corporate governance. For example, Chung et
al.(2003) reports that the market valuation of the firm’s capital and R&D investments depends critically on board
composition, but not on institutional holding. With a high proportion of outside directors they find a significant and
positive correlation between firm’s value and both capital and R&D investments. It is worth noting that the results are
for firms that are largely followed by security analysts. In contrast, they find in their empirical study correlations
between firm value and R&D investments are insignificant for firms with less analyst following and /or with a low
proportion of outside directors. They also find that the level of institutional holdings do not have a significant effect on
the market valuation of R&D and capital expenditures. Le et al.(2006) report that institutional investors moderate the
form of the R&D spending-performance relationship and independent outside board members influence the strength of
that relationship. While they find evidence that securities analysts have a direct impact on firm performance it does not
moderate the R&D spending-performance relationship;Hall and Oriani (2006) find that firms controlled by a major
shareholder have a better market valuation of R&D. This means that the R&D spending-performance relationship is
moderated by major shareholder. Chang et al. (2008), Yeh et al. (2008), Chung and Shen (2009) examine the influence
of corporate governance on the wealth effect (Cumulative Abnormal Return) of corporate R&D expenditure. Chang et
al. (2008) finds that stock markets respond more favorably to announcement of an increase in R&D expenditure by
firms with stronger internal governance; Yeh et al. (2008)’s study shows that investors on average respond favorably to
a firm’s R&D announcement and the response is greater for firms with a small and independent board. Chung and Shen
(2009)’s results indicate that firms with better monitoring governance mechanisms experience an abnormal return on
R&D investment.
The existence of the principle-agent problem prevents the proper performance of R&D projects which are
designed to maximize shareholder’s interest. Proper corporate governance can reduce the information asymmetry,
supervise managers, control opportunistic behaviors of managers and ensure the implementation of R&D project in
accordance with shareholder’s interest (Wright et al.2002). Therefore, the relation between R&D investment and firm’s
performance varies with the differences in corporate governance. Methodologically, corporate governance moderates
the relationship between R&D investment and firm performance.
Moderating effects of board
Agency theorists argue that the board, with its legal authority to hire, fire, and compensate top management,
safeguards invested capital and, thus, are an important element of corporate governance (Williamson, 1984).So, its
impact on R&D investment is self-evident. The following review of research is mainly concerned on the effect of board
size and board composition on R&D investment.
Several studies have examined the relationship between board size and R&D investment. Some researchers have
pointed out that large boards have a range of expertise and can bring a diversity of views and experience, increase the
opportunity for a broad geographic representation, and provide extensive director resources for constituting board
committees to deal effectively with complex issues (e.g. Rao and Lee-Sing, 1995). In addition, larger boards are better
for corporate R&D investments because they are harder for a CEO to dominate. In contrast other researchers have
suggested that large boards can be less effective than small ones. When boards become too big, agency problems (such
as director free-riding) increase with the board, and the board becomes more symbolic and less a part of the
management process (Jensen, 1993; Hermalin and Weisbach, 2003).
Wu (2000) has structured similar arguments such as: (i) small board of directors facilitate better communication
among directors, more effective coordination of the directors’ expertise, and speed up action when there is a problem;
and (ii) a limited number of board members preventing a board from developing into a bureaucracy, from dividing into
cliques, and from encouraging passivity at meetings. In the literature we also find the evidence that smaller board size
translates into better firm performance (Yermack, 1996; Eisenberg et al. 1998). Hence it is expected that smaller boards
would facilitate higher R&D intensity strategy of firms that would lead to shareholders’ wealth creation.
In our opinion, the size of the board is not the critical factor related with R&D expenditure. The size of the board
The Journal of International Management Studies, Volume 7, Number 1, April, 2012 44
depends on the firm size, business scope, business complexity, nature of the industry, business environment, and many
other exogenous variables. Song et al. (2009) in their empirical result indicates that the size of the board and firm’s
performance have no significant relation and have pointed out that a change of board’s size in cross-section just reflects
the difference in company's operating environment rather than unreasonable use of governance mechanisms. Therefore,
we should place less focus on the size of board which depends on specific business circumstances and cannot be
generalized. We should mainly consider whether a given board plays a real role in influencing R&D expenditure and
how to make the board perform better. The independence and incentive system are critical for better performance of the
board.
Researchers have used as a variable the proportion of outside directors to indicate the independence of board.
Outside directors are expected to represent the interests of shareholders by mitigating agency problems between
management and shareholders (Fama and Jensen, 1983; Subrahmanyam, et.al., 1997). Such consideration may lead one
to conclude that a board's independent outside directors are expected to help promote strategic orientations that benefit
stockholders' wealth, including investment in R&D (Kosnik, 1990; Baysinger et al. 1991). However, Baysinger and
Hoskisson (1990) pointed out that high proportion of outside directors may unexpectedly cause a negative effect on
manager’s strategy-orientation. Outside directors prefer to maintain an open and subjective relationship with top
management, but they simply lack the amount and quality of information upon which such relationships must be based.
For example, outsiders usually serve as directors on several boards. Between managing their own businesses and
serving on multiple boards, outside directors may not be able to "understand each business well enough to be truly
effective"(Patton and Baker, 1987).In addition, inside directors and outside directors obtains information in different
ways. Outside directors obtain business information mainly through financial statements whereas insiders usually
access information by participating in the decision processes. Consequently, outside directors may suffer a comparative
disadvantage, relative to insiders, especially with regard to R&D projects which are of long term duration because of
serious information asymmetry . More likely a moderate proportion of outside directors is conducive for R&D project.
Board, the link between stockholders and managers, not only plays the role of a monitor and as an agent of
stockholders, but also commit managers to operate specific business as principals. This then would lead to exiting the
principal-agent problem between board and shareholders. It is necessary to limit or eliminate the principle-agent
problem between board and shareholders to ensure that the board acts in the interests of stockholders. For this to happen
if directors own a certain proportion of the stock of the company their interests will be more consistent with those of the
shareholders, in turn they will become more competent strategic monitors (Kosnik, 1990). The Risk preference and
degree of effectiveness of directors who own the stock in their company will certainly be different from those directors
whose income are only from cash compensation.
Besides the independence and necessary compensation of the board, spending an adequate amount of time to
carry out directors’ duties is also important for a better performance of the board. Lipton and Lorsch(1992) pointed out
that the most widely shared problem directors have is a lack of time to carry out their duties. They suggest boards
should meet at least bimonthly with each meeting lasting a full day, including committee sessions and other related
activities. In addition, one meeting each year lasting two or three days should be viewed as strategy sessions. Vafeas
(1999) indicated that board activity, measured by the frequency of board meetings, is an important dimension of board
operations. So, if the board meeting is more frequent, there is more time for the directors to carry out their duties which
helps for timely solution to the problems existing in the R&D activities, and ensures successful implement of R&D
project.
Based on the above analysis, we suggest the following hypotheses for testing the moderating effects board may
have on the association of R&D spending and firm performance.
Hypothesis 1. The R&D investment-performance relationship is moderated by independent board director in “inverted
U-shape”.
Hypothesis 2. The R&D investment-performance relationship is positively associated with board ownership.
Hypothesis 3. The R&D investment-performance relationship is positively associated with board meeting frequency.
The Journal of International Management Studies, Volume 7 Number 1, April, 2012 45
Moderating effects of managerial incentive
Two major agency problems between managers and shareholders may influence corporate decisions regarding
R&D investment. The first agency problem is goal divergence and risk differential between managers and shareholders.
Goal divergence and risk differential may lead to acute conflicts of interest in corporate decisions, such as R&D
expenditures. R&D investment will reduce net returns on the current balance sheet (Baysinger and Hoskisson, 1989).
Additionally, the payoffs from R&D investment are neither immediate nor certain, and thus increase employment risk
for managers (Alchian and Demsetz, 1972; Wiseman and Gomez-Mejia, 1998). Influenced by concerns regarding
personal wealth and job security, risk-averse managers may be less likely to make R&D expenditures in certain
situations than shareholders, who are concerned with maximizing returns. The second agency problem related to R&D
is hidden information and hidden action confronted by employers (Zenger, 1994). Employees generally have private
knowledge on innovative projects and their expected obstacles; however, they may act passively in reporting or solving
those problems. Furthermore, the efforts that employees put into R&D are often difficult for shareholders to assess and
extremely costly for them to monitor. These hidden information and monitoring problems increase R&D risks and
agency costs, which in turn increase the likelihood of R&D failure.
To solve these agency problems associated with R&D, firms need to control managers by some monitor
mechanism (e.g. ownership structure and board of director) and also build up an incentive alignment mechanism to alter
the risk orientation of managers and induce the desired efforts from employees.
Employee stock ownership is one form of incentive alignment that makes employees become part owners of the
business (Pugh et al., 2000). Through granting stock to managers, the goals of managers become similar to those of
shareholders by further alleviating the agency conflicts associated with manager risk taking propensities. Thus, risk-
averse managers are inclined to undertake risky investments, such as making large expenditures in R&D. Furthermore,
employee stock ownership may transfer partial risk from shareholders to employees. Bearing risk from uncertain
payoffs and a strong probability that R&D will fail, employee-owners are induced to increase their efforts at work and
to unselfishly share their private knowledge and information with the firm. In brief, employee stock ownership could
help reduce agency conflicts between managers and shareholders alleviating agency costs, in turn decreasing R&D risks
while increasing the likelihood of success in R&D. In other words, manager ownership moderates the relationship
between R&D spending and firm performance.
Hypothesis 4. The R&D investment-performance relationship is positively associated with manager ownership.
RESEARCH DESIGN
Data
The data is drawn from Chinese A-share manufacture companies listed in the main board from 2004-2009 that
voluntarily reported R&D expenditure in the financial statements. To avoid any confounding events that could distort
the corporate governance and performance, we excluded those firms which have been listed less than two years until the
selected year. Also, the specially-treated and insolvent companies were deleted. After screening the sample, we get 102
samples in 2004, 119 samples in 2005, 149 samples in 2006, 156 samples in 2007, 150 samples in 2008 and 151
samples in 2009. Since these firms went public in different years and not all of them continued to report R&D through
these six years, the sample data does not include an equal number of observations for each firm. The final data sample
yields a total of 828 firm- year observations. The study gathered the corresponding financial data and corporate
governance data from the CCER database, which is compiled by China Center for Economic Research and Beijing
Xenophon Information Services. Only the mandatory disclosure information is included in this database. In China,
disclosure of annual R&D expenditures is not compulsory. So this database does not provide R&D data. The R&D data
have been hand collected from the financial statements, which are from websites such as
http://www.cs.com.cn,http://www.csrc.gov.cn/pub/newsite/ et al.. Considering the lag effect of decision and R&D
outputs, R&D data lag one year of corporate governance data and firm performance data lag one year of R&D data.
Thus, our data actually cover the period 2003-2010.
The Journal of International Management Studies, Volume 7, Number 1, April, 2012 46
Measure
(1) Independent variable and dependent variable
The independent variable in this study is R&D intensity, which is calculated as the level of investments divided
by the firm’s total assets (Chen and Huang, 2006). The measure was adopted because total assets were relatively stable,
while sales could fluctuate significantly. The study’s dependent variable is firm performance measured as the lagged 1-
year return of assets (ROA) using profit from principal operations divided by average net assets.
(2)Moderating variables
The moderating variables include board size, board independence, board ownership, board meeting frequency and
management ownership. Board size is the number of directors sitting on the board at the shareholder meeting date.
Board independence is calculated as the number of independent board members divided by board size. In this study,
board meeting frequency refers to the number of meetings held by the board of directors annually, including written
consent of the board and telephonic meetings. The variable board ownership is measured as shares holding by board of
director dividing by total shares. Also, we define management ownership as shares holding by managers (excluding
supervisors and board of directors) dividing by total shares.
(3) Control variables
To reduce the possibility of model misspecification, we control for additional variables in our empirical model.
Large firms may have more resources for R&D activities, possibly influencing the R&D spending-performance
relationship (Finkelstein and Hambrick, 1989), so we added a proxy for firm size (the natural log form of operating
revenue) as a control variable. As firms with greater financial leverage may outperform less leveraged firm in good
times and under perform in bad times, we included each sample firm’s debt-to-equity ratio.
Analytical method
Following Le et al. (2006), we identified all types of moderating effects of corporate governance on the R&D
spending-performance relationship by hierarchical regression and subgroup analysis methods. We used hierarchical
regression to examine whether corporate governance affects the form of the relationship, and we used subgroup analysis
to examine whether they influenced the strength of the relationship.
Referencing to Sharma et al. (1981)’s research, we illustrate the identifying moderating effect of corporate
governance on the R&D spending-performance relationship in Fig.1.
The Journal of International Management Studies, Volume 7 Number 1, April, 2012 47
No Yes
Yes No Yes No
Yes No
Yes No
Figure 1: Identifying Moderating effects of governance mechanisms on the R&D investment -corporate
performance relationship CG is the abbreviation of corporate governance. CP is the abbreviation of corporate performance.
EMPIRICAL RESULTS
Descriptive statistics
Table 1 summarizes the basic descriptive statistics of firm characteristic .Table 2 presents the correlation matrix of
the variables included in our study. It shows that the mean value of R&D intensity is 0.547% which is comparable to the
corresponding figures (0.59%) reported in Liu Yunguo and Liu Wen(2007)and the standard deviation is 0.928%.
This suggests that the R&D intensity of Chinese manufacture listed companies is very low and there are large
differences among firms. Chen and Huang (2006) reported that the average R&D intensity (R&D spending /total assets)
of Taiwan’s IT enterprises reached 2.45% over 1996-2001 period. Hall and Oriani(2006)reported that the average
R&D intensity of firms in the United states, France and Germany over 1989-1998 period were respectively 4.9%, 4.2%
and 4.5%. Compared with these three countries, on average Italian and British firms had a significantly lower R&D
intensity, of 3.3% and 2.9 % respectively but are significantly higher than for Chinese firms.
Table 1: Descriptive statistics of firm characteristic for the sample period 2004-2009
Variables Sample size Min 1st Quartile Median 3st Quartile Max Mean Std. D
ROA (%) 827 -78.430 2.47 7.570 15.17 231.430 7.57 15.834
R&D intensity (%) 827 0.001 0.113 0.291 0.643 11.192 0.547 0.928
Board size 827 3.000 9.000 9.000 11.000 17.000 9.617 1.893
Board shareholding (%) 827 0.000 0.000 0.001 0.010 58.305 0.947 5.919
Independent board director ratio(%) 827 12.500 33.333 33.333 36.364 60.000 35.344 4.653
Management shareholding (%) 827 0.000 0.000 0.002 0.020 26.102 0.269 2.076
Board meeting frequency 827 3.000 6.000 8.000 10.000 36.000 8.288 3.204
Firm size(Log of operation revenue) 827 18.367 20.542 21.226 22.012 25.785 21.330 1.206
LEV(debt-to-equity ratio) 827 0.000 0.608 1.009 1.635 22.200 1.294 1.273
Is CG variable related
to R&D or CP?
CG is a homologize
variable.
Does CG variable interact
significantly with R&D?
Is CG related to
CP?
相关
CG is not moderator
variable.
Do subgroup
analysis.
CG is quasi
moderator variable.
vvariable
CG is a pure
moderator variable
Are subgroups different
with respect to R2?
CG is not a
moderator variable.
The Journal of International Management Studies, Volume 7, Number 1, April, 2012 48
Table 2: Correlation matrix of variables variables 1 2 3 4 5 6 7 8
1. ROA (%)
2. R&D intensity (%) 0.081*
3.Board size 0.002 0.066
4.Board ownership(dichotomous variable) 0.011 -0.044 0.03
5.Independent board director ratio( %) 0.042 -0.015 -0.198** -0.078*
6.Management ownership(dichotomous variable) -0.049 -0.006 -0.11 0.564** 0.017
7.Board meeting frequency -0.022 -0.003 -0.003 -0.061 0.075* 0.009
8.Firm size(Log of operation revenue) 0.149** 0.034 0.242** 0.104** 0.12** 0.112** 0.186**
9.LEV(debt-to-equity ratio) 0.153** -0.085* 0.035 0.044 0.043 -0.022 0.123** 0.035 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Regression results
Table 3-10 present results of the logistic regression analyses .We begin our formal analysis by investigating the
effect of board size on the R&D-performance relation. The results of table3 and table4 show that the R&D-performance
relation is not effected by board size. This result is consistent with our conjectures.
We cannot test Hypotheses 1. It is shown in table 1 that the mean and median of independent board director ratio
are 35.344% and 33.333% respectively and the standard deviation is only 4.653%.This suggests that the independent
board director ratio of most Chinese listed companies (59.61% companies in our sample )just meet with the legal
minimum limit (which is no less than 1/3). So, when we use hierarchical regression method to test the effect of
independent director on the R&D-performance relation, it appears that multicollinearity issue is apparent. Thus, in this
study, we cannot provide the evidence on the importance of independent director in explaining the relationship between
R&D investment and firm performance.
Given that board ownership, board meeting frequency and management ownership were not found to be directly
related to firm performance, nor moderate the form of the R&D spending-performance relationship (per results
presented in Table 5,7and 9), we tested for the possibility that these variables moderate the strength of the relationship.
In order to do so we split the sample at the mean value of board meeting frequency (which was 8.288) and we split the
sample at whether board members holding shares or not. Also, we split the sample at whether managers (except
directors and supervisors) holding shares or not. We then regressed R&D spending along with our control variables on
firm performance for each sub-sample. The regression models are presented in Table 6, 8 and 10. Our results suggest
that board ownership,board meeting frequency and management ownership moderate the strength of the R&D
spending-performance. Interestingly, in contrast with expectations of Hypothesis 2-4 which assumes a positive
relationship between board ownership,board meeting frequency and management ownership and R&D investment-
performance, our empirical results show that the relationship of R&D investment –performance is negatively associated.
Nevertheless, our results provide some evidence on the importance of board and incentive system in explaining
the relationship between R&D investment and firm performance.
Table 3: Hierarchical regression analysis of board size effect on the relationship between R&D investment and
firm performance (N=827)
Variables Model1 Model2 Model3
R&D intensity (%) 0.088 * 0.09** 0.221
Firm size 0.11** 0.119*** 0.119***
LEV(debt-to-equity ratio) 0.130*** 0.129*** 0.129***
Board size
-0.037 -0.019
R&D intensity*Board size
-0.137
F value 12.441*** 9.614*** 7.822***
Adjusted R2 0.040 0.040 0.040 *p<0.05;**p<0.01;***p<0.001(2-tailed)
The Journal of International Management Studies, Volume 7 Number 1, April, 2012 49
Table 4: Subgroup analysis of board size’s moderating effect on the relationship between R&D investment and
firm performance
Variables Board size
large small
R&D intensity (%) 0.062 0.084
Firm size 0.103* 0.256***
LEV 0.033 0.007
F Value 2.910* 8.912***
Adj.R2 0.012 0.066
Dif.in R2 0.054
N=492 N=335 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 5: Hierarchical regression analysis of board ownership effect on the relationship between R&D
investment and firm performance (N=827)
Variables Model1 Model2 Model3
R&D intensity (%) 0.088 * 0.082* 0.083 *
Firm size 0.11** 0.113** 0.113**
LEV(debt-to-equity ratio) 0.130*** 0.132*** 0.132 ***
Board ownership
0.058 0.064
R&D intensity*Board ownership
-0.01
F value 12.441*** 10.064*** 8.050***
Adjusted R2 0.040 0.042 0.041 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 6: Subgroup analysis of board ownership’s moderating effect on the relationship between R&D
investment and firm performance
Variables
Whether board holding shares or not
Yes No
R&D intensity (%) 0.05 0.147**
Firm size 0.121* 0.117**
LEV -0.013 0.047
F Value 2.505 5.315***
Adj.R2 0.01 0.034
Dif.in R2 0.024*
N=455 N=372 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table7: Hierarchical regression analysis of board meeting frequency’s effect on the relationship between R&D
investment and firm performance (N=827)
Variables Model1 Model2 Model3
R&D intensity (%) 0.088 * 0.087* 0.043
Firm size 0.11** 0.120*** 0.119***
LEV(debt-to-equity ratio) 0.130*** 0.135*** 0.136***
Board meeting frequency
-0.061 -0.075
R&D intensity*Board meeting frequency
0.050
F value 12.441*** 10.121*** 8.144***
Adjusted R2 0.04 0.042 0.041 *p<0.05;**p<0.01;***p<0.001(2-tailed)
The Journal of International Management Studies, Volume 7, Number 1, April, 2012 50
Table 8: Subgroup analysis of board meeting frequency’s moderating effect
on the relationship between R&D investment and firm performance
Variables Board meeting frequency
high low
R&D intensity (%) 0.063 0.106**
Firm size 0.155** 0.084*
LEV -0.083 0.312***
F Value 3.147* 24.092***
Adj.R2 0.021 0.118
Dif.in R2 0.097*
N=308 N=519 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table9: Hierarchical regression analysis of management ownership’s effect on the relationship between R&D
investment and firm performance (N=827)
Variables Model1 Model2 Model3
R&D intensity (%) 0.088 * 0.083 * 0.084*
Firm size 0.11** 0.111** 0.111
LEV(debt-to-equity ratio) 0.130*** 0.137*** 0.138***
Management ownership 0.035 0.038
R&D intensity*Management ownership -0.004
F value 12.441*** 9.591*** 7.665***
Adjusted R2 0.04 0.040 0.039 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 10: Subgroup analysis of management ownership’s moderating effect on the relationship between R&D
investment and firm performance
Variables
Management ownership
Y N
R&D intensity (%) 0.049 0.104**
Firm size 0.221*** 0.109**
LEV -0.158** 0.202***
F Value 4.231** 14.259***
Adj.R2 0.035 0.067
Dif.in R2 0.032*
N=271 N=556 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Robustness Checks
In this section we present robustness checks to test whether our results are sensitive to the alternative choices in
our research design. Because of cross-period income in R&D investment, our result may vary with the duration of lag
and we test the robustness of our results by using two-year lag performance variable. The result of this analysis
indicates that our original findings obtained with one-year lag performance are not sensitive to the duration of lag. Table
10-17(in appendix) present results of robustness test.
DISCUSSION AND CONCLUSION
In this paper we have addressed questions related to the moderating effect of board and managerial incentive on
R&D spending- firm performance relationship. To our knowledge, this is the first in-depth empirical analysis of
influence of corporate governance on R&D-firm performance relationship in China. We have theorized that board of
director and managerial incentive may moderate R&D spending-performance relationship. Our results demonstrate that
board of director and managerial incentive do indeed affect R&D spending-performance. However, some of our
empirical results go contrary to our hypothesis. We found that the independent board director ratio of most of Chinese
listed companies just meet with the legal minimum limit of a third of the total number of board of directors. So we
cannot provide evidence on the independent board directors’ role in R&D investment in this study. Our results show that
The Journal of International Management Studies, Volume 7 Number 1, April, 2012 51
board ownership,board meeting frequency and management ownership moderate the strength of the R&D spending-
performance. This indicates that board ownership, board meeting and management ownership have an indirect effect on
the R&D-firm performance relationship. However, these three variables have negative influence on the R&D-
performance relationship which is inconformity with our hypothesis. It is possible that managers of Chinese listed
companies are myopic and stock ownership incentive is not a sole factor required for initiating R&D project.
Traditionally, agency theorists do not differentiate risk differences associated with stock ownership and stock options.
However, behavioral agency theorists argue that stock option pay is fundamentally different from stock ownership in
terms of managerial responses to downside risks (Wiseman and Gomez-Mejia, 1998). More specifically, stock
ownership has a linear relationship with stock price, and a downside risk may discourage executives from risk-taking
decisions. On the other hand, option pay does not result in real and immediate wealth reduction given that the stock
price is dropping. Thus, stock option pay encourages managerial risk-taking behavior. Owing to high risk and cross-
period income in R&D investment, manager’s stock options may well be a more active factor than stock ownership in
initiating R&D investment. The literature provides some empirical evidence for the fact that stock option may facilitate
managerial risk-taking behavior. For instance, Wu and Tu’s (2007) study have found that CEO stock option pay has a
significantly positive effect on R&D spending, while CEO stock ownership has no such effect. Our study provides
additional evidence on Sanders(2001) finding that stock ownership and option pay have different effects on managerial
risk taking. However, we are unable to examine this proposition in this study because few Chinese listed companies
adopt stock option pay for managers.
Inference from our data analysis is that frequency of board meetings is negatively associated with R&D –
performance relationship. This indicates that the frequency of board meeting is relatively high when R&D project has a
poor performance and vice versa. These results provide additional impetus to the findings of Vafeas (1999) which
reported the annual number of board meetings is inversely related to firm value. Also, Tang and Luo (2006), Chen and
Liu (2006) reported that the number of meetings of the board of directors of Chinese companies had a negative
correlation with firm performance. All these results suggest that the board in Chinese companies has a passive role in
corporate governance. Our conclusion supports Jensen (1993)’argument that the role of corporate boards becomes
increasingly more important during crises, when shareholders' interests are in visible danger and as performance
declines, boards are likely to become more active to cope with these problems rather than prevent these problems in
advance.
In this article, we have analyzed the moderating effect of corporate governance on R&D spending-firm
performance relationship based on hitherto unavailable and unstudied data on Chinese listed companies. This study has
provided new and sometimes puzzling evidence which can further stimulate the debate on corporate governance-R&D
investment relationship in China. Even though the evidence is based on a limited number of samples, it represents a first
step into a deeper investigation of the interactions between corporate governance, R&D investment and firm
performance in contexts where the corporate governance regime and investment environment are significantly different
from those of the United States or the United Kingdom.
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APPENDIX
Table 10: Hierarchical regression analysis of board size effect on the relationship between R&D investment and
firm performance (Lag two-year performance) (N=676)
Variables Model1 Model2 Model3
R&D intensity (%) 0.091 * 0.097** 0.332
Firm size 0.197** 0.220*** 0.222***
LEV(debt-to-equity ratio) -0.055 -0.059 -0.06***
Board size
-0.075 -0.061
R&D intensity*Board size
-0.246
F value 10.956*** 9.775*** 8.186***
Adjusted R2 0.042 0.049 0.051 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 11: Subgroup analysis of board size’s moderating effect on the relationship between R&D investment and
firm performance(Lag two-year performance)
Variables Board size
large small
R&D intensity (%) 0.052 0.074
Firm size 0.101* 0.252***
LEV -0.047 -0.043
F Value 2.910* 8.912***
Adj.R2 0.013 0.065
Dif.in R2 0.052 N=243 N=433
*p<0.05;**p<0.01;***p<0.001(2-tailed)
The Journal of International Management Studies, Volume 7, Number 1, April, 2012 54
Table 12: Hierarchical regression analysis of board ownership effect on the relationship between R&D
investment and firm performance (Lag two-year performance) (N=676)
Variables Model1 Model2 Model3
R&D intensity (%) 0.091 * 0.090* 0.133**
Firm size 0.197** 0.198** 0.196**
LEV(debt-to-equity ratio) -0.055 -0.055 -0.056
Board ownership
-0.012 0.020
R&D intensity*Board ownership
-0.077
F value 10.956*** 8.233 *** 7.047***
Adjusted R2 0.042 0.041 0.043 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 13: Subgroup analysis of board ownership’s moderating effect on the relationship between R&D
investment and firm performance(Lag two-year performance)
Variables
Whether board holding shares or not
Yes No
R&D intensity (%) 0.024 0.156**
Firm size 0.215 *** 0.179**
LEV -0.010 0.039
F Value 5.596 7.604***
Adj.R2 0.038 0.058
Dif.in R2 0.020*
N=351 N=325 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table14 Hierarchical regression analysis of board meeting frequency’s effect on the relationship between R&D
investment and firm performance (Lag two-year performance) (N=676)
Variables Model1 Model2 Model3
R&D intensity (%) 0.091 * 0.090* 0.078
Firm size 0.197** 0.202*** 0.202***
LEV(debt-to-equity ratio) -0.055 -0.052 -0.052
Board meeting frequency
-0.036 -0.039
R&D intensity*Board meeting frequency
0.014
F value 10.956*** 8.436*** 6.742***
Adjusted R2 0.042 0.042 0.041 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 15: Subgroup analysis of board meeting frequency’s moderating effect on the relationship between
R&D investment and firm performance(Lag two-year performance)
Variables Board meeting frequency
high low
R&D intensity (%) 0.071 0.103*
Firm size 0.093 0.246 ***
LEV -0.057 -0.046
F Value 1.229 11.03***
Adj.R2 0.003 0.063
Dif.in R2 0.060*
N=230 N=446 *p<0.05;**p<0.01;***p<0.001(2-tailed)
The Journal of International Management Studies, Volume 7 Number 1, April, 2012 55
Table 16: Hierarchical regression analysis of management ownership’s effect on the relationship between R&D
investment and firm performance (Lag two-year performance) (N=676)
Variables Model1 Model2 Model3
R&D intensity (%) 0.091 * 0.089 * 0.115**
Firm size 0.197** 0.204 *** 0.200***
LEV(debt-to-equity ratio) -0.055 -0.059 -0.057
Management ownership -0.076 -0.052
R&D intensity*Management ownership -0.054
F value 10.956*** 9.261*** 7.661***
Adjusted R2 0.042 0.047 0.047 *p<0.05;**p<0.01;***p<0.001(2-tailed)
Table 17: Subgroup analysis of management ownership’s moderating effect on the relationship between R&D
investment and firm performance(Lag two-year performance)
Variables
Management ownership
Y N
R&D intensity (%) 0.028 0.121**
Firm size 0.229*** 0.166***
LEV -0.096 -0.05
F Value 5.089** 7.648***
Adj.R2 0.035 0.070
Dif.in R2 0.035*
N=193 N=483 *p<0.05;**p<0.01;***p<0.001(2-tailed)