C31RF Research in Finance 2021 – 2022
Course Work: Panel Data Analysis
1. Overview
This mid-term assignment is based on 30% of total marks in C31RF on an individual
project.
Submission format: each student submits the assignment in Canvas.
Deadline for submission: Week 8 Monday 28th Feb 2022 4pm.
2. Background
Research and Developing spending (R&D) are vital for a firm’s long-term value creation.
However, it may take the cash away for a short period and lower the short-term accounting
profit. Therefore, senior managers may be reluctant to invest on R&D. Some authors find that
CEO’s ownership and board structure may have some important impacts on a firm’s R&D
spending (e.g., Baysinger et al, 1991; Baker and Muller, 2002). To be more specific, high level
of CEO ownership may align the interests between CEO and shareholders, making CEO more
likely to create long-term value. Good board structure (e.g., high proportion of independent
directors in the board) may monitor CEOs more effectively, making CEO less likely to do
short-sighted behaviours.
➢ In this course work, you are expected to empirically examine the relation between a
firm’s R&D spending with CEO ownership and board structure. Can UK CEO
ownership and board structure explain a firm’s R&D spending?
➢ Literature also suggests that some firm characteristics, like firm size, capital structure,
profitability, growth prospect and firm risks have impacts on a firm’s R&D spend.
Therefore, we also should control those factors when we do this research.
3. Data
Your data file is prepared in advance. You can download the data file (Excel) from Canvas. It
is from part of Kabir, Li and Veld-Merkoulova (2013), “Executive Compensation and the Cost
of Debt”, Journal of Banking & Finance. Since the research purpose for Kabir, Li and VeldMerkoulova (2013) is not to investigate R&D spending, the sample is not randomly selected
from the general population. It only contains FTSE ALL firms (All publicly listed firms in the
main board of London Stock Exchange) which had straight bonds in pound sterling outstanding
from 2003-2011.
3. Reports Requirement
1) Establish your hypothesis.
You need to give prediction in a hypothesis based on literature (You should find more related
literature to support your hypothesis). For example, H1: There is a positive (or negative)
relation between XXX and XXX.
2) Briefly describe the research method you intend to employ.
This should include: what is the model (formula)? what is the dependent variable? And what
are independent variables and control variables?
3) Demonstrate empirical results.
You are required to employ proper model(s) you learn from this course. Results should be
demonstrated in well-organized table(s).
Do not copy the original format of tables from E-views or Stata!
Look at papers on how they present tables!
4) Briefly discuss your results and give the conclusion(s).
5) Briefly discuss the limits and potential problems of this research
6) The length for the assignment should be around 1200 words, excluding tables and
references.
References
Barker III, V.L. and Mueller, G.C., 2002. CEO characteristics and firm R&D
spending. Management Science, 48(6), pp.782-801.
Baysinger, B.D., Kosnik, R.D. and Turk, T.A., 1991. Effects of board and ownership structure
on corporate R&D strategy. Academy of Management journal, 34(1), pp.205-214.
Kabir, R., Li, H. and Veld-Merkoulova, Y.V., 2013. Executive compensation and the cost of
debt. Journal of banking & finance, 37(8), pp.2893-2907.
Appendix
Variable Name Definitions
RD Research & Development expenses scaled by a firm’s annual sales.
For example, 0.01 means a firm spends 0.01% of is annual sales as
R&D. This variable is to measure the R&D spending intensiveness.
Higher the figure, relatively more fund is pumped to R&D.
Ownership Number of shares for a CEO scaled by a firm’s total number of shares
outstanding. For example, 0.01 means CEO has 0.01% of this firm’s
total share. This variable is to measure CEO’s incentive level. Higher
the figure, CEO’s interests are more aligned with that of shareholders.
Board Structure Number of independent directors scaled by total number of directors.
For example, 0.75 means 75% of this firm’s board members are
independent. This variable is to measure the level of independence of
board directors. Higher the figure, the board is assumed to be more
powerful to monitor senior managers.
Board Size Number of directors.
Firm Size Natural log of total assets.
Leverage Book value of long-term debt scaled by total assets.
Profitability Net earnings scaled by total scales.
MTBR Market to Book ratio. Market value of equity and debt scaled by book
value of total assets.
Risk Standard deviation of net operating cash flows over last 6 years.
Years Dummy variables to control period effects.