Open AccessDo Institutional Investors Aleviate Agency Costs in R&D Investment Decisions?
Author(s) -
Ricky William Scott
Publication year - 2017
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v6n3p24
Subject(s) - agency cost , investment (military) , agency (philosophy) , institutional investor , cash flow , free cash flow , principal–agent problem , investment decisions , business , shareholder , finance , monetary economics , control (management) , economics , microeconomics , corporate governance , behavioral economics , politics , political science , law , philosophy , management , epistemology
This study tests whether institutional investors encourage R&D investment in firms with potential agency problems. Firm and year fixed effect regressions and difference-GMM regressions are used to examine the effect of changes in institutional investor levels to subsequent changes in R&D investment levels. Increased institutional ownership leads to increased R&D investment and this relationship is stronger in firms more susceptible to agency problems. Agency-based free cash flow theory predicts that institutional investors will encourage R&D investment in firms with good investment opportunities, but they will not encourage R&D investment simply because a firm has higher free cash flow. My results support this prediction indicating that institutional investors help to control agency problems in R&D investment decisions. The results in this paper indicate that this may lead to a decrease in agency costs in R&D decisions, thus benefiting institutional and non-institutional shareholders.