Firm R&D Strategies Impact of Corporate Governance

Reporting a positive relationship between institutional ownership on one hand and capital expenditures and research and development (R&D) activity on the other, Wahal and McConnell (2000) conclude that powerful investors do not drive managers to behave myopically. We provide complementary evidence by relating managerial power (lower shareholder rights) to R&D investment decisions. We argue that managerial risk aversion may incentivize more powerful managers to underinvest in long-term --and potentially risky-projects with negative consequences for corporate value. Our evidence suggests that firms with higher managerial entrenchment behave relatively more myopically than those with greater shareholder power. For a sample of 5173 US firms, results indicate that there exists a significant negative relation between managerial entrenchment --proxied by Gompers et al (2003) governance indexand propensity to undertake in-house R&D, as well as, R&D investment levels. Further, firms with more entrenched management undertake less risk.