R&D, Corporate Governance and Profitability of Firms – a literature review

This paper aims to provide a summarize review of recent empirical research, in the field of corporate governance and its relation to performance of firms. Specifically, the focus is on the role of institutional owners in the conflict between controlling shareholders and minority owners. The paper also contributes to the literature on corporate governance and performance by providing some discussion on the statistical methods used in most empirical investigations. Summing up recent studies in the evaluation of firms’ investment performance has shown significant differences in the valuation of firms, depending on the market expectations and industry affiliation. Focusing on the role of institutional owners in relation to firms’ investment performance, the existing empirical evidence suggest that institutional owners have a positive influence on firms’ investment performance. Studies that looks at the role of institutional owners from the perspective of dividend policy has shown that institutional owners demand higher dividends to compensate for aggravated agency conflicts due to vote-differentiated shares. A large body of research investigates the performance of firms from a long run perspective. These studies demonstrate that profits converge over time, but the convergence is incomplete. Investment in R&D is often put forward as an explanation for persistent profits above the norm. Looking at individual mutual funds, and specifically how to measure risk-adjusted performance, investigations generally show that mutual funds underperform in relation to their market benchmark, even when risk-adjusted to the same level of risk.

Introduction: During  recent  decades  the  world’s  financial  markets have  seen  an  ongoing  increase in  institutional  ownership  of capital.  Do  these  institutional  owners  behave  differently  from other owners,  and  what  are  the  consequences  on  firm  performance?  Do research  in  corporate  governance   provide  the answers? These issues, and  specifically  how  the  increasing  institutional  ownership  has  affected  investment  performance  in listed firms, are dealt with  in this paper. The  role of  the  financial market  is  to  transfer  savings  to  investors,  and establish  relative  prices  that  serve  as  signals  to  guide  the  allocation  of capital.  The  efficiency  of  this  allocation is anessential   force  in  the  creation  of  wealth  and  economic  growth.  At  the  same  time,  this allocation mechanism is the result  of decisions  taken  by individuals or by people appointed to act  on  their  behalf.  Of  particular  interest  therefore  are  the  formal  and  informal  rules  that surround  and  affect  this  allocation process,  that  is,  the  corporate governance  system.

Author: Daniel Wiberg

Source: Royal Institute of Technology

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