Exploring the Link Between Corporate Governance and R&D Investments on Brazilian Listed Companies

Introduction

In today's world, where competition and the need for constant innovation are a reality, organizations are giving greater importance to investments in Research and Development (R&D) (Lv et al., 2019). Such investments enable technological innovation, as well as the improvement of a given product or service, improving its quality and reducing costs to benefit users.

According to Honoré et al. (2015), the financing and generation of efforts in R&D by companies are crucial pillars for the launch of new products and fundamental to sustainability and productivity. These initiatives are, therefore, seen as essential components for organizational advancement (Muhammad et al., 2022). Fortunato et al. (2012) supplement this perspective by emphasizing the continuous need for companies to invest. These investments are essential not only to expand production and meet the excess market demand but also to innovate in cost reduction or achieve productivity improvements, replace obsolete equipment, or even create barriers to the entry of new competitors into the market.

However, the decision-making process regarding these investments is strategic, which makes assessing the associated risks crucial (Lee, 2015). According to Lee (2015), there is a divergence in expectations between investors and organizational managers. Investors tend to favour investments in R&D for their potential high returns and risks. At the same time, managers may prefer more cautious approaches to minimize personal risks, such as job loss, since such investments may prove unprofitable. The uncertainty of returns, the complexity of their assessment, and the possibility of being indeterminate for a significant period, along with the potential inefficiency of the productivity of such expenses, especially when there are failures in internal control systems, are relevant factors in decision-making (Jensen, 1993; Chan et al., 2015; James & McGuire, 2016).

Cordis and Kirby (2017) warn about market imperfections, which make deeper analyses necessary regarding the impacts brought by investments, as these may not add value when seeking, for example, to meet managers' interests, which characterizes a problem of agency (Fama, 1970; Jensen & Meckling, 1976). From this perspective, Baysinger et al. (1991) justify that divergence between market participants can generate a conflict in decisions about R&D investments, which can result in the so-called agency problem. According to Eisenhardt (1989), the agency problem is related to the difference in behaviour and objectives between managers and shareholders.

In this context, investment in R&D is rooted in Agency Theory, as it is a decision that can lead to conflicts of objectives since managers are averse to risk and have a preference for short-term gains, with a strategy of search for efficiency because their efforts are directed only at the company they manage, that is, they take a more cautious stance on risk to protect their employment, which can harm long-term gains and innovation. At the same time, shareholders tend to be risk-neutral, as they have opportunities to invest in several companies, thus diversifying their investments (Honoré et al., 2015).

As an attempt to solve agency problems, corporate governance stands out, which, based on a set of restrictions on managers' actions, seeks to reduce the inadequate allocation of investors' resources (Corrêa et al., 2015). Ratifying, La Porta et al. (2000) and Toigo et al. (2018) report that these are mechanisms through which external investors protect themselves against expropriation by those internal to the organization. In other words, corporate governance concerns the set of controls, internal and external, that aim to minimize the conflict of interests related to the agency problem (Baysinger & Hoskisson, 1990). Therefore, governance practices positively affect R&D investments (Honoré et al., 2015; Rodrigues et al., 2020).