Effective innovation via better management of firms: The role of leverage in times of crisis

The relationship between innovation activities and firm performance has been well established in the context of major economies. However, in the case of emerging economies, firms are more financially constrained, and they tend to suffer from weaker-management practices, which can be a drag on their performance despite greater innovation. Hence, whether better-managed firms benefit more effectively from innovation with greater access to finance remains unexplored. Using quarterly firm-level data during 1992–2015 from Turkey, this paper aims to uncover whether innovation intensity, in the traditional sense, namely R&D and intangibles, and better managerial practices, in the modern form, contribute to the performance of Turkish firms. By considering the financial constraints before and after the 2008 global financial crisis and by undertaking an impact evaluation of improved accounting regulation relating to disclosure on management practices, we find that all types of innovation activities boost profitability. In addition, R&D activities, with better management quality, help improve firm performance. Furthermore, although higher debt level, in general, is harmful, firms with better management quality make more effective use of innovative activities, along with higher financial leverage, in boosting their performance. Lastly, those better-managed firms in an emerging economy outperformed even during times of financial stress following the global financial crisis. The above findings survive a battery of robustness checks.