The Effects of R&D Investment and Firm Size on Growth Opportunities of Newly Listed Firms: European Evidence

Abstract

Using data for 831 IPO firms listed from 1986 to 1998 in the UK, France, Germany and Italy, this paper investigates the inter-relationships between R&D and growth opportunities in different national systems of corporate governance. Results indicate that growth opportunities are positively related to R&D investments, and negatively related to financial leverage and firm size. Growth opportunities are also negatively related to the interaction between financial leverage and R&D investments, particularly countries with weak minority shareholder protection, such as Germany, Italy and France. Further, a positive effect of the interaction between leverage and R&D activities is greater in larger UK firms, but negative in smaller UK firms. The interaction of leverage and R&D has a negative effect on growth in small firms and this is stronger in continental Europe than in the UK.

Keywords: Growth Opportunities, Newly Listed Firms, Leverage, Firm Size, External Corporate Governance mechanisms

JEL Classification: G31, G32, G34