The current study aims to explore the theoretical and empirical opinion about the role of research and development (R&D) on firm performance by analyzing R&Ds' current and lagged effect on performance. In addition, the study tested the mediating role of green innovation strategies and the moderating role of environmental, social and governance (ESG) practices in strengthening the impact of R&D on profitability by integrating signaling and stakeholders with agency theory.
To scrutinize the validity of the propositions, the study tested A-share listed Chinese firms from the Shanghai Stock Exchange and Shenzhen Stock Exchange for 2018–2022. The selected sample is regressed by using fixed effects and Arellano–Bond generalized method of moments to deal with time-variant unobserved heterogeneity arising due to R&D and the issue of endogeneity.
The study found that R&D has a negative current and positive lagged effect on corporate performance. However, green innovations failed to mediate the current value of R&D but succeeded in mediating the lagged effect of R&D on corporate performance. Moreover, the study found a dominant moderating role of ESG practices in controlling the negative impact of current R&D on firm performance.
The findings are useful for corporate managers in implementing ESG practices and formulating green strategic policies, especially when the firms are aggressively pursuing R&D growth strategies. The study also stresses the regulatory authorities of emerging economies to enforce corporate boards to adopt and implement ESG practices for the protection of the rights of all the stakeholders. The findings are also helpful for individuals to make a diversified, low-risk and high-return investment portfolio.
By applying the mediation and moderation effects, the research enhances the understanding of the underlying causes of the association between R&D strategies and corporate performance. The current research contributes to the literature that agency issues created due to R&D expenditures can be settled by green innovations and ESG practices in firms.
