Department of Finance Published Work

Do co-opted boards enhance or reduce R&D productivity?

Authors: Oneil Harris (FINA), Charmaine Glegg (FINA), Winston Buckley
Publication: The North American Journal of Economics and Finance

Abstract: The literature suggests that firms with more co-opted directors—those appointed after the chief executive officer (CEO) assumes office—are subject to less oversight than other firms. Chintrakarn, Jiraporn, Sakr, and Lee (2016) recently show that co-option leads to higher R&D investments and posit that managers with co-opted boards are more motivated to make long-term investments because they are less likely to be removed. Under this view, co-opted directors mitigate managerial myopia. However, since the outcomes of R&D projects are known to be stochastic, this study expands upon prior research by examining how board co-option affects R&D productivity (not just R&D spending). We find strong evidence indicating that co-opted directors enable managers to overinvest in inefficient R&D projects, thereby reducing R&D output. Our results support an agency theory view for the increases in R&D investments linked to co-opted directors rather than the decline in managerial myopia perspective.

Keywords: Agency theory, Board co-option, R&D productivity