The relation between share repurchases and research and development investments in light of a socio-political approach

Details

Supervisors

Bascle, Guilhem

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

Through this master thesis, we contribute to the existing literature on the relation between share repurchases and research and development in Europe and we extend the literature on the socio-political approach from Zajac and Westphal. Our data sample is composed by 345 companies from the S&P 350 Europe Index from 1999 to 2019. Firstly, we confirm the negative impact of share repurchases on research and development investments. Secondly, we find that, in setting of high performance, an increase of performance indicators leads to a stronger negative impact, suggesting a decline in the CEOs’ power over the allocation of financial resource. Thirdly, we find that a high analyst coverage leads to a stronger negative impact, suggesting that external pressure from analysts also reduces the power of the CEOs. Finally, we suggest that institutional ownership reinforces the power of CEOs, or at least that they share the same interest to invest in long-term value of the company rather than in a short-term satisfaction of investors. Based on these results, we have identified three implications: (1) CEOs who achieve high financial performance should pay attention not to cut research and development investments to satisfy short-term expectations; (2) Investors looking for short-term satisfaction should favour companies with a strong analyst coverage; (3) CEOs who are concerned about institutional pressure should not be worried about any loss of power over the allocation of financial resources to research and development.