R&D Investment Under the Influence of Board Characteristics and Performance Feedback

The performance feedback process, assumed by the behavioural theory of the firm, has been studied in numerous studies and its influence on firms' R&D expenditures has been confirmed. It supposes that a firm pays attention to certain aspiration levels-comprising of the firm's historical performance and the performance of its peers. When this level is not attained, a firm is motivated towards change, which is often translated as an increase in R&D spending. However, performance feedback is clearly not the only one of the possible factors affecting firms' short-term behaviour. In this paper, it is argued that board characteristics-notably board size, age of its members and board turnover-and their changes can influence yearly differences in R&D spending as well. This paper studies the joint influence of the performance feedback process and board characteristics on a sample of large German industrial firms listed on the exchange markets. Data for the sample was collected for the years 2001-2015. A separate aspiration model is deployed, expecting a division of a firm's attention between historical and social aspiration levels. Moreover, models also control for available and potential slack resources influence. Using panel data analysis by hierarchical linear models with fixed effects, the results point out to partial confirmation of performance feedback influence on a German industrial firms' behaviour in terms of R&D investment. Slack is also found as an important factor explaining changes in a firm's R&D spending. Additionally, some interesting boards' characteristics' effects are observed, which could lead to deeper understanding of firm behaviour. The research adds up to an understanding of firm behavioural patterns. Overall, the paper confirms the existence of certain behavioural factors affecting a firm's investment in R&D, meaning that the overall budget devoted to R&D activities is not fully determined by the potential of its components, but is often subject to changes caused by current performance and board characteristics.