Corporate Governance, Product Market Competition, and the Wealth Effect of R&D Spending Changes

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.