Academic journal article Accounting & Taxation

Relationships between Institutional Ownership, Capital Structure and Research and Development Investment

Academic journal article Accounting & Taxation

Relationships between Institutional Ownership, Capital Structure and Research and Development Investment

Article excerpt

ABSTRACT

Research and development (R&D) is vital for an information technology (IT) firm's innovation. This study investigates the relationship among institutional ownership, capital structure, and research and development investment for 336 listed information technology firms from 2006 to 2009. Empirical evidence shows that there is no significant relationship between institutional ownership and research and development investment. The finding suggests that institutional investors may not influence management decision making on research and development investment. This study also finds that capital structure has a negative relationship with research and development investment. The result indicates that information technology firms may use less debt when the investment outcome is uncertain.

JEL: M400, M490

KEYWORDS: Research and Development, Institutional Ownership, Capital Structure, Information Technology

INTRODUCTION

High levels of institutional ownership of publicly held companies have led to concerns about the potential effects such ownership can have on research and development (R&D) investment. Another considerable factor deemed relevant in R&D investment decisions is capital structure. The choice of investments can influence the choice of financing (Williamson, 1988). The evidence for a negative relationship between institutional ownership and R&D is widely evident (Graves, 1988, Dong & Gou, 2010, White, 1987, Zahra, 1996). However, existing empirical work contradicts that thesis (Jarrel and Lehn, 1985, Graves 1990). Overall, the literature regarding capital structure paints the picture suggesting a firm's intensity of investments in R&D will influence capital structure (Simerly and Li, 2000, Long and Malitz, 1985, Vincente-Lorente, 2001).

Extending the work of previous literature, this study investigates the relationship between the institutional ownership, capital structure, and research and development (R&D) investments for 336 listed information technology (IT) companies in Taiwan. Taking an industry specific perspective, as well as international perspective, can provided interesting insights that will add to the current literature. We hypothesize that institutional ownership has a positive relationship with R&D investment. Empirical results find no association between institutional ownership and R&D expenditures, suggesting that institutional investors may not influence management decision making on R&D investment. We also hypothesize that capital structure has a negative relationship with R&D investment. Consistent with our hypothesis, an increase in R&D investment is associated with lower debt. The rest of this paper is structured as follows: We first describe the relevant literature and develop our hypotheses. Next, we discuss the sample data and methodology used in the study. Then we present the results of the tests and the primary conclusions.

LITERATURE REVIEW

For young innovative firms, the most important assets are intangible assets such as research and development (R&D). Efficient R&D investments result in advanced products or services, which enable a firm to generate persistent profits (Chauvin & Hirschey, 1993, Ho, Keh, & Ong, 2005). However, R&D investments are not reported in firms' financial statements under U.S. GAAP and their valuation is more complicated (Hirschey & Weygandt, 1985, Sougiannis, 1994). For example, U.S. GAAP requires the full expensing of R&D expenditures (Cañibano et.al., 2000, Han & Manry, 2004, Lev & Sougiannis, 1996).

R&D investments make significant contributions to information technology (IT) firms (Lee & O'Neill, 2003, Noriyuki, 1985). The development of IT plays a key role in Taiwan economic growth over the last decade. Since 1995, Taiwan has become the world's third-largest supplier in the IT industry after the United States and Japan. …

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