The moderating effect of interlocking directors on the relationship between R&D investments and firm value

Although the relationship between firm R&D and performance has been analysed in previous literature from different viewpoints, few studies have analysed how the board of directors, one of the main governing bodies with responsibility at strategic level, may affect this relationship. In particular, previous works have studied some characteristics related to the monitoring role of the board. However, it is also likely that access to external information and resources crucial for firms that want to innovate and improve their performance might be facilitated through the links held by interlocking directors (who also serve as directors in other firms). This paper aims to shed light on this topic by providing the first research focusing on how a board’s provision of knowledge and advice proxied by the percentage of interlocking directors may moderate the firm R&D-performance classical relationship. Using a sample of 106 Spanish listed companies in the period 2008–2019, GMM analyses show that R&D investments have a positive effect on firm value, but a larger number of interlocking directors may diminish this positive effect. Our results suggest that firms should be cautious about increasing the proportion of interlocking directors. A larger number of such directors may affect the flow of information within the board and, consequently, positive interactions between the board, firm innovation and performance. In addition, we recommend that policy makers should reinforce incentives to increase firm innovation as it seems to increase firm value and, when drafting corporate governance codes, should reflect in more detail on the role played by interlocking directors.