*2.3. R&D Background of Managers and the Impact of Overborrowing on Firms' R&D*

There are already a handful of studies that have examined the association of various top managers' characteristics with innovation [69,70]. Much of this research started with a study by Dearborn and Simon (1958), who argued that experience with the goals, rewards, and methods of a particular functional area causes managers to perceive and interpret information in ways that suit and reinforce their functional training [71]. Top managers' biases and dispositions do have their greatest influence on organizational outcomes in complex and uncertain conditions, whereas these unobservable psychological traits of top managers are inherently related to their personal characteristics [72,73]. As key firm capability for innovation, R&D capability is particularly influenced by top management experience because it depends on perceptions of organizational and industry environments [74]. R&D functional experience will provide managers with expertise knowledge, increase team heterogeneity, and reduce short-sightedness, thus promoting the firm's innovation [75]. More importantly, top managers with functional experience in R&D often possess more private information in specified R&D projects, which would enable them to make innovation-related financing decisions prudentially and appropriately as well.

In innovation activities it is often impossible to accurately measure inputs into the innovation process [51], and one can hardly write complete contracts when one does not even know what the output might be [76–78]. In such cases, when making an innovation decision, top managers are generally more risk-averse than investors, since they cannot diversify the risk of their specified investment across different companies [50,51,79]. Notwithstanding the foregoing problems, some researchers argue that managers with R&D experience would contribute to increasing firms' R&D expenditure. Several studies support this line of reasoning. Special purpose investments entail asset specificity, such as the R&D expenditures considered here [80,81]. Research has shown firms engaged in innovation have a high percentage of intangible assets, where knowledge is embedded in the human capital of the firms' managers. This key resource is lost if managers leave or are laid off [82]. Managers therefore tend to smooth R&D spending over time to avoid being laid off, leading R&D spending at the firm level to behave as if it has high adjustment costs. In addition, the innovation process contains knowledge management at various levels; such a process would also lead to dynamic changes in firms' asset specificity [83,84]. Andreou and Bontis (2007) argue that knowledge management affects the components and structure of human capital [85]. If the top managers have a higher degree of knowledge specificity, such as more specialized knowledge of R&D, the firms can achieve greater specific human capital [86]. These conditions allow for chances that agency costs in financing innovation be significantly weakened when top managers have R&D functional experience. Therefore, we propose that top managers with R&D functional experience have greater incentives in R&D spending that may help mitigate the impact of overborrowing.

**H3:** *Top managers with R&D functional experience contribute to weakening the mediating effect of overborrowing*.
