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Corporate Governance, Product Market Competition, and the Wealth Effect of R&D Spending Changes
Author(s) -
Liao TsaiLing,
Lin WenChun
Publication year - 2016
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12161
Subject(s) - corporate governance , product market , competition (biology) , profitability index , shareholder , monetary economics , argument (complex analysis) , product (mathematics) , wealth effect , business , economics , market competition , value (mathematics) , market economy , finance , incentive , monetary policy , biochemistry , chemistry , geometry , mathematics , machine learning , computer science , biology , ecology
This article examines whether corporate governance and product market competition interact to affect the profitability of corporate research and development (R&D) investments. Firms announcing R&D spending changes experience positive and significant wealth effects, and these effects are mainly driven by good‐governance firms. Investors appear to view announcements of R&D spending changes undertaken by firms with stronger shareholder rights as evidence of value creation. Moreover, the favorable wealth effects are stronger for good‐governance firms in noncompetitive industries than in competitive industries, supporting the argument that good governance substitutes for product market competition.