Corporate governance and the valuation of R&D

Abstract

The dissertation studies how corporate governance mechanisms influence the valuation of corporate research and development (R&D) investment. First, I examine how internal and external corporate governance affect the equity holders' valuation of R&D. Using a sample of U.S. firms from 1998 to 2006, I find that: (1) boards that are more independent and whose independent directors have more outside directorships are associated with higher R&D valuation; (2) less anti-takeover provisions (market control mechanism) are also associated with higher R&D valuation; and (3) effective board governance (market control mechanism) is associated with higher R&D valuation only in the presence of weak market control mechanism (board governance). My results provide evidence indicating that both internal and external governance enhance R&D valuation, but they substitute in doing so. Next, I focus on the effect of corporate board to enhance the R&D valuation. Effective corporate governance can enhance the market valuation of R&D either by increasing the expected future cash flows (numerator effect), by decreasing the cost of equity (denominator effect), or by both. Examining a sample of U.S. firms, I provide evidence suggesting that: (1) R&D expenditures are positively associated with expected future cash flows, and this positive association is higher with more effective corporate boards; and (2) firms with more R&D expenditures enjoy a lower cost of equity, and this relationship is stronger when corporate boards are more effective. My findings suggest that boards enhance R&D valuation through both increasing R&D-induced expected future cash flows and decreasing R&D-related cost of equity. Finally, I turn my focus from equity holders to debt holders. I first examine the relationship between R&D investments and cost of debt and then further explore boards' potential influence on it. I find that firms with more R&D expenditures are associated with lower credit ratings (a higher cost of debt), and further, boards that are more independent and whose independent directors have more outside directorships are associated with a less pronounced negative relationship between R&D expenditures and credit ratings.