Managerial ability and R&D investment: do CEOs’ and firms’ characteristics matter?

ABSTRACT

Previous studies document that investing in research and development is a key factor to keep firm survive in the long-run. This study instead focuses on the relationship between managerial role and R&D decisions. Specifically, we investigate whether more talented managers facilitate firms’ R&D investment. Using the MA-score as a proxy for managerial ability, we find that more able managers increase R&D spending. Furthermore, the results show that more talented managers decide to invest more in R&D investment depending on several conditions, such as whether firms are financially unconstrained or in non-crisis period. Other conditions include whether firms are facing lower default probability, in competitive industries, and with some CEOs’ characteristics, such as male, young age, higher granted stock option and higher salary.

KEYWORDS:

• More talented managers
• R&D investment
• CEOs’ granted stock option
• CEOs’ salary

JEL CLASSIFICATION:

• G01
• G30

Authors contributions

Three authors provided critical feedback and helped shape the research, analysis and manuscript.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ The MA-score data is derived from the following website: https://peterdemerjian.weebly.com/managerialability.html.

² Please see variables’ definitions in Appendix A.

³ The fixed-effect model can effectively control the unobservable variables in a panel dataset (Hausman and Taylor 1981). The Hausman specification test is further verified, and the results show that the fixed-effect model is appropriate; therefore, the rest of this study prefers the fixe-effect model to the random-effect one.

⁴ To validate our hypothesis, we have four regression equations (only MA-score without any control variables, MA-score with firms’ characteristics, MA-score with firms’ characteristics and firms’ financial policies and MA-score with CEO characteristics).

⁵ The KZ index is available upon request.

⁶ Given that credit market conditions are likely to be related to economic conditions, the literature also uses recessions to proxy for distressed credit markets (e.g. Valenzuela 2015; Lee and Wang 2022; Wang 2022).

⁷ Another important measure of market concentration is Herfindahl-Hirschman index (HHI).

⁸ Since the variance component is unknown, the Generalized Least Squares (GLS) estimator needs to be executed to obtain consistent estimates. Baltagi and Chang (2000) suggest to use the simple consistent estimators and the Swamy–Arora method.