Corporate governance, research and development volatility and firm performance - Evidence from Spain and Ireland

Abstract

The present study sheds light on the comparative experiences of the two countries originating from differing legal systems and describes how their codes and practices affect the publicly listed firms’ performance. It investigates the linkages between Research and Development (R&D) expenditures, Board characteristics and firm performance using a sample of Irish and Spanish firms for the period 2005–2014. To do this, the study uses ROA and Tobin’s Q as proxies for financial performance; and board size, non-executive directors, female representation and CEO duality as board structure characteristics; and R&D expenditure volatility, employing different techniques that include OLS, fixed effects model and Quantile regression model. The difference-in-difference model is used to verify the significance of robustness of relationships considering the global financial crisis as an exogenous shock. The descriptive statistics suggests a comparability of boards’ independence for the Spanish- and Irish-listed firms. Although the Spanish firms are less dual than Irish firms, the results are comparable on the association between CEO duality and firm performance. The findings of Spanish-listed firms on the relationship between increase and decrease in the R&D expenditures volatility and performance support the creative–destructive perspective that suggests effective governance in funding allocation to R&D.

Keywords:

• research and development volatility
• boards
• corporate governance
• creative –destructive perspective
• Spanish- and Irish-listed firms
• difference-in-difference model

JEL classification:

• G.30
• G.32
• G.34
• N.24

Public Interest Statement

The present study sheds light on the comparative experiences of the two countries originating from differing legal systems and describes how their codes and practices affect the publicly listed firms’ performance. It investigates the linkages between Research and Development (R&D) expenditures, Board characteristics and firm performance using a sample of Irish and Spanish firms for the period 2005–2014.

From the legal origin point of view, Irish corporate governance codes originate from common law jurisdiction while Spain belongs to civil law jurisdiction. Notably, regarding female board representation, Spain has a quota system in place and for Ireland, there is no such quota law on gender diversity. However, on average, the women representation on boards of Spanish corporates is around 10% while for Ireland it is at 8% (Rodriguez-Ferández, 2015). This offers a natural experiment to test financial crisis as an exogenous shock and it shows the effectiveness and relevance of the newly introduced code on female representation in Spain to the firm performance.

Additional information

Notes on contributors

Geeta Duppati

Geeta Duppati is a senior lecturer in the Department of Finance, University of Waikato, Hamilton, New Zealand. She has been extensively involved in several years of teaching experience at the undergraduate and graduate levels and taught, among other courses, financial management, advanced corporate finance, financial markets and institutions, mergers and acquisitions and firm valuation. Her current research interests are primarily concerned with corporate governance, asset pricing, corporate social responsibility, foreign investment, state-owned enterprises and mergers and acquisitions.

Albert Sune

Albert Sune is a lecturer in strategy and operations management, department of management, Universitat Politècnica de Catalunya. His research interests focus on how learning and forgetting processes are involved in organisational change, including change in resources, routines and identity and also in organisational behaviour and Work–Life interface across cultures.

Navajyoti Samanta

Navajyoti Samanta is currently a lecturer in commercial law at Sheffield, UK. His teaching and research is focused on empirical company law and corporate governance. In spite of the diverse expertise, the three authors have passion towards research in corporate governance.