How does ownership by corporate managers affect R&D in the UK? The moderating impact of institutional investors
International Journal of Productivity and Performance Management
ISSN: 1741-0401
Article publication date: 21 May 2021
Issue publication date: 29 November 2022
Abstract
Purpose
This paper tests for a positive, a negative and a nonlinear relationship between the share of ownership controlled by firm managers and the management decision to invest in research and development (R&D). Likewise, it examines whether or not institutional investors induce corporate managers with ownership stakes to spend on R&D.
Design/methodology/approach
It examines a sample of the United Kingdom (UK) Financial Times Stock Exchange (FTSE) all-shares firms over a longitudinal period from 2009 to 2018. The R&D is measured by the natural logarithm of a firm's R&D spending and a firm's R&D expenditure scaled by its total assets at the end of the year. The results are estimated using the year/industry fixed effects as well as the firm fixed effects.
Findings
The results show a positive effect on R&D spending at a lower level of managerial ownership, and a negative impact at a higher managerial ownership level. The findings jointly suggest an inverse U-shaped nonlinear relationship between ownership by firm managers and management decisions on R&D spending. The results also demonstrate that the effect of institutional investors' ownership on R&D spending decisions is observable only at a lower level of managerial ownership and disappears at a higher level.
Practical implications
The results shed the light on the role of managerial ownership in promoting firm innovation. They suggest an optimal level of equity ownership by corporate managers that maximizes R&D spending, implying that firms can effectively manage their R&D spending by restructuring their managerial ownership to maintain an appropriate level of managerial ownership to align managerial interests with shareholder interests by either increasing it to the optimal level or decreasing it when it becomes above this level. The findings also support the limited degree of monitoring and the long-term perspective offered by institutional investors in the UK
Originality/value
The study provides new evidence on the non-monotonic effect of the share of ownership controlled by firm managers on R&D spending decisions. It also expands the growing body of literature and contributes to the debate on the effectiveness of institutional investors in the UK.
Keywords
Acknowledgements
* The authors would like to thank Dear Prof. Luisa Huaccho Huatuco (editor of the International Journal of Productivity and Performance Management) and the anonymous referees for their helpful comments and suggestions which substantially improve the quality of the paper.
Citation
Hassanein, A., Marzouk, M. and Azzam, M.E.A.Y. (2022), "How does ownership by corporate managers affect R&D in the UK? The moderating impact of institutional investors", International Journal of Productivity and Performance Management, Vol. 71 No. 8, pp. 3636-3654. https://doi.org/10.1108/IJPPM-03-2020-0121
Publisher
:Emerald Publishing Limited
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