Corporate Governance, Insider Ownership and Risky Investments in R&D Projects: Developed and Emerging Markets

In the research we studied the influence of corporate governance and insider ownership on corporate risky R&D investment intensity. We analyzed companies from pharmaceutical and biotechnological industries because risky investments are extremely important in these sectors. Empirical evidence shows that corporate governance factors and insider ownership influence risky R&D investments in a different way in developed and emerging markets. Proportion of independent directors is associated with lower R&D investment intensity in developed markets. As R&D investments are extremely high in developed markets, we suppose that overinvestment problem can exist. Thus, better corporate governance can decrease the investments closer to optimal level. In emerging markets proportion of independent directors positively connected with R&D investments. Such results can be explained by the fact that independent directors monitor risk-averse managers that underinvest in risky, but perspective projects. CEO-Chairman separation does not significantly influence R&D investments. This result can be achieved because personal characteristics of managers are different and there is no clear pattern of the separation effect. We can also suppose that both CEO and Chairman of the Board tend to be rather risk-loving in pharmaceutical and biotechnological industries, and separation have no effect on risky investments. Insider ownership also have no significant influence on R&D investments. Such result can be explained by the fact that not all the insiders can influence investment process. Moreover, beneficial owners can lack industry specific knowledge that allow them to monitor the process. Analysis also shows that companies with higher proportion of independent have more collaborations with scientific institutions in emerging markets. In developed markets these factors are not connected.