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Law and R&D over-investment efficiency
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TitleLaw and R&D over-investment efficiency  
AuthorWang Lanfang, Wang Yue and Hou Qingchuan  
OrganizationShanghai University of Finance and Economics; 
Key WordsR&D Over-investment; Law Environment; Invention Patent; Utility Model Patent; Firm Value 
AbstractThis paper investigates the impact of law on the likelihood of over-investment in R&D as well as R&D over-investment efficiency. We specifically focus on R&D over-investment rather than normal or total R&D investment, which sheds light on resource allocation efficiency. We find that in regions with better law environment, firms are less likely to make R&D over-investment. It is found that R&D over-investment is positively associated with utility model patents rather than invention patents in terms of patent applicants, valid patents, number of IPCs and claim rights. Our findings show that R&D over-investment spur short-term accounting performance such as ROA & ROE, but mitigate firm valuation measured as Tobin’s Q. Further subsample analyses suggest the short-term and long-term efficiency of R&D over-investment only appears in firms headquartered in regions with weak law quality, suggesting the importance of law in mitigating managers’ incentives in R&D over-investment as well as its negative effects. We contribute to provide empirical evidence of the impact of law on R&D over-investment determinant and efficiency. We also give rise to constructing suggestions to the government involvement in firm innovation. 
Serial NumberWP1091 
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