R&D intensity and firm valuation: Effect of director and manager incentives

Abstract

Using a sample of 5829 Taiwanese firm-year observations over the 2008-2012 period, we examine the relationship between R&D expenditure and firm valuation. For the whole sample, we find a significant positive association between R&D investment and firm valuation as measured by Market-to-book ratio. However, we also find the dummy variable for Director and Officers liability insurance to be a highly significant variable. Furthermore, we find that the positive association is only effective for the sub-sample of firms with D&O insurance. This is a natural experiment in which we see the critical moderating role played by the incentive of directors and officers as affected by D&O insurance in the relation between R&D spending and firm value.