Corporate governance and R&D investment: the role of debt financing

• Published in: Industrial and corporate change Vol. 31; no. 3; pp. 628 - 653
• Main Authors: Muhammad, Hussain, Migliori, Stefania, Mohsni, Sana
• Format: Journal Article
• Language: English
• Published: UK Oxford University Press 01.06.2022
• ISSN: 0960-6491; 1464-3650
• DOI: 10.1093/icc/dtab056

Abstract This paper examines the role of debt financing in the relationship between corporate governance and research and development (R&D) investment using a sample of publicly traded U.S. pharmaceutical firms from 2009 to 2018. The results show a positive and significant association between corporate governance mechanisms (such as board size, board independence, board gender diversity, and ownership concentration) and R&D investment and a negative and significant association between debt financing and R&D investment. In addition, we show that debt financing plays a moderating role and a partial mediating role in the relationship between corporate governance mechanisms and R&D investment. Specifically, debt financing attenuates the negative effect of board size on R&D investment and accentuates the positive effect of ownership concentration on R&D investment. Our study helps to shed light on a close and complex relationship existing between the firm’s choices of corporate governance, debt financing, and R&D investments, which the previous literature has so far examined in a partial and fragmented way. To ensure effective R&D investment, firms need to consider the effect of debt financing on corporate governance decisions.