Abstract
The existing literature has yet to provide consistent evidence on the relationship between R&D investments and firm performance. The current study attempted to fill this gap in the literature by examining the effect of lag structure and the moderating role of financial governance, in terms of debt capital and ownership concentration, on the returns of R&D. Analyzing a sample of China's pharmaceutical firms from 2009 to 2018, we found that the effect of R&D upon growth begins in the second year after R&D spending and increases thereafter. There exists a vigorous debate about the choice between debt and ownership structure. To fill this gap, we proposed a three-way interactive effect. The results suggest that firms that invest heavily in R&D may achieve their highest performance when the use of debt capital and the extent of ownership concentration are both low. This study contributes to the R&D investments and financial governance literature by reconciling previous mixed evidence about the returns of R&D and the debt–equity choices on R&D investment decisions.
Highlights
The coronavirus disease 2019 (COVID-19) pandemic underscored the importance of research and development (R&D) in the pharmaceutical industry
In the context of China’s pharmaceutical industry, this study aimed to provide plausible answers to the following questions: [1] What is the lagged effect of R&D investments on firm performance? [2] How do ownership and debt structures affect the return of R&D investments?
R&D investments play an important role in sustainable competitive advantages for pharmaceutical firms, especially after COVID-19; there is no general consensus in the literature about the effect of R&D investments on firm performance [8, 37, 137]
Summary
The coronavirus disease 2019 (COVID-19) pandemic underscored the importance of research and development (R&D) in the pharmaceutical industry. The share of revenues that pharmaceutical firms invest in R&D has grown, i.e., approximately one-quarter of their revenues (net of expenses and buyer rebates) in 2019, which is almost twice as large a share of revenue as spent in 2000 [4, 5]. This share is larger than that for other innovation-based industries, such as semiconductors, technology hardware, and software [5]. It is crucial to explore how pharmaceutical firms mitigate the hazards of R&D investments on current firm performance before making an investment decision
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