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Effects of Innovation Investment on Profitability and Moderating Role of Corporate Governance: Empirical Study of Indian Listed Firms

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  • Showkat Ahmad Busru
  • G. Shanmugasundaram

Abstract

Innovation investment decisions are always riskier business decisions, especially when it is a question of spending on research and development, but it is a vital area of decision-making which enhances growth and sustainability. First, we attempted to investigate the bidirectional causality between R&D and profitability measured in terms of NP (net profit), ROA and ROE through Granger causality test from a sample of 255 sample Indian listed firms for a period of eight years ranging from 2008 to 2015, while finding unidirectional causality only between R&D expenditure and profitability, we moved for analysing the magnitude of relationship through multiple regression model which revealed that R&D expenditure negatively affects the profitability but affects the profitability of subsequent years positively while taking lags. Further, moderating regressions equation was employed to assess the moderating role of corporate governance variables such as board size, board independence, family ownership, foreign and institutional ownership with controlling effects of size, market capital and liquidity position. The results revealed that all moderating variables except board size affect the slope of regression positively, but technically only family ownership moderates the relationship between R&D expenditure and profitability as there is significant change in f -value while moderation effect of family ownership is taken into consideration. Only board size affects negatively the relationship questioning the role of internal board and their interest in innovation for maximising personal benefits on the expense of risk-bearing shareholders and stakeholders. Our results were in conformity with some prior studies but have also shown contradiction with results of developed estates regarding role of board for balancing the agency theory conflicts, hence creating room for Indian corporate culture with a full-fledged system which can strike a balance between interest of agents and principals with protection to minority shareholders and overall stakeholders.

Suggested Citation

  • Showkat Ahmad Busru & G. Shanmugasundaram, 2017. "Effects of Innovation Investment on Profitability and Moderating Role of Corporate Governance: Empirical Study of Indian Listed Firms," Indian Journal of Corporate Governance, , vol. 10(2), pages 97-117, December.
    • Handle: RePEc:sae:ijcgvn:v:10:y:2017:i:2:p:97-117
    DOI: 10.1177/0974686217730938
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    2. Muhammad Usman Yousaf & Muhammad Kashif Khurshid & Aftab Ahmed & Muhammad Zulfiqar, 2019. "Empirical investigation of relationship between research and development intensity and firm performance: The role of ownership structure and board structure," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 6(02), pages 1-27, June.
    3. Showkat Ahmad Busru & G. Shanmugasundaram & Shariq Ahmad Bhat, 2020. "Corporate Governance an Imperative for Stakeholders Protection: Evidence from Risk Management of Indian Listed Firms," Business Perspectives and Research, , vol. 8(2), pages 89-116, July.
    4. Dejan Ravšelj & Aleksander Aristovnik, 2020. "The Impact of R&D Expenditures on Corporate Performance: Evidence from Slovenian and World R&D Companies," Sustainability, MDPI, vol. 12(5), pages 1-20, March.
    5. Venkata Mrudula Bhimavarapu & Shailesh Rastogi & Rajani Gupte & Geetanjali Pinto & Sudam Shingade, 2022. "Does the Impact of Transparency and Disclosure on the Firm’s Valuation Depend on the ESG?," JRFM, MDPI, vol. 15(9), pages 1-12, September.
    6. Khleef A. Alkhawaldeh, 2021. "The Impact of Innovation on Profitability of Jordanian Services Companies," International Journal of Business and Management, Canadian Center of Science and Education, vol. 16(1), pages 1-92, August.
    7. P. Fahad & P. Mubarak Rahman, 2020. "Impact of corporate governance on CSR disclosure," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 17(2), pages 155-167, September.
    8. Wojciech Chmielewski & Marta Postuła & Przemysław Dubel, 2023. "The Impact of Expenditure on Research and Development on Selected Energy Factors in the European Union," Energies, MDPI, vol. 16(8), pages 1-18, April.

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