The Implications of Long-Term Performance Plans and Institutional Ownership for Firms' Research and Development (R&D) Investments

Abstract

This study examines whether long-term performance plans and institutional holdings are associated with the level of R&D spending in firms. This paper contributes to the growing literature on the impact of mechanisms to mitigate the short-term focus of managers and investors. This study, unlike prior work, examines two mechanisms simultaneously, longterm performance plans and institutional investor holdings. We find no evidence that the adoption of long-term performance plans has implications for R&D spending. We do find evidence that holdings by institutional investors are positively associated with the level of R&D spending in the firm. These results indicate that the horizon of institutional investors may influence managers' planning horizons and how they decide on long-term investments, but managers' decisions on R&D investments are not afected by the introduction of performance plans. When examining the influence of R&D spending on institutional holdings, the simultaneous equations show that holdings by banks and insurance companies are lower in firms that have higher R&D. In contrast, holdings by "other" institutions are higher in firms that have higher R&D. the workshop participants at the University of Michigan and the National University of Singapore are also much appreciated. Comments from an anonymous reviewer have been helpful in improving this paper. Frederic W. Cook kindly provided survey reports of compensation schemes of the top 200 industrial companies for our sample. We thank Soo Chen Wong and Kok Choy Fong for their research assistance.All errors remain our responsibility. 117 at FRESNO PACIFIC UNIV on December 27, 2014 jaf.sagepub.com Downloaded from 18. Outliers (those with an absolute value for the studentized residual greater than three or Cook's distance measure greater than one) are deleted from the sample. Eight observations are deleted from the sample. When outliers are not removed from the sample, the coefficients on TOTAL, is -0.003 (t statistic = -2.446), BNK (0.332, t statistic = 1.216), INS (-0.282, tstatistic = -1.154), INV (-0.107, t statistic = -1.241), ADV (-0.033, t statistic = -1.197), OTH (-0.235, t statistic = -1.173).19. None of the variables have a variance inflation factor (VIF) greater than 10, which would have indicated multicollinearity. The variable with the highest VIF is lagged R&D (5.48). Mean VIF values considerably larger than one indicate serious multicollinearity problems (Neter, Wasserman, and Kutner [1989]). The mean VIF value is 2.405. We conclude that although there may be a multicollinearity problem, it is not serious.

The Financing of Innovative Firms

“…There is some limited evidence that this may indeed be the case. Eng and Shackell (2001) find that firms adopting long-term performance plans for their managers do not increase their R&D spending but that institutional ownership is associated with higher R&D. In addition, R&D-performing firms tend not to be held by banks and insurance companies, at least in the US These types of firms are presumed to be poor at monitoring R&D performance. Majumdar and Nagarajan (1997) find that high institutional-investor ownership does not lead to short-term behaviour on the part of the firm; in particular, it does not lead to cuts in R&D spending.…”

The impact of corporate governance practices on R&D efforts: a look at shareholders' rights, cross-listing, and control pyramid

“…options will not be exercised). Here, empirical evidence is surprisingly abundant but fails to provide robust evidence of the impact of detailed Anglo-American compensation practices on R&D or innovation (see, among others, Eng and Shackell, 2001, or Holthausen et al, 1995, versus Cho, 1992, or, Xue, 2007. 7 The introduction and influence of such compensation schemes may be mitigated when viewed in the national context.…”

Determinants of Capital Structure for Firms that Provide High Quality Sustainability Reporting

“…On the contrary, institutional ownership has a negative effect on the short-term debt ratio. As it is reviewed above in the leverage factors section, institutional investors reduce the myopic investment pressure on the management and encourage long-term investments (Edmans, 2009;Hansen & Hill, 1991;Bushee, 1998;Eng & Shackell, 2001). Therefore, in order to match the maturities, firms, which are highly owned by institutional owners, may prefer long-term debt instead of short term debt.…”

“…Institutional investors reduce the myopic investment pressure on management and encourage long-term investments (Edmans, 2009;Hansen & Hill, 1991;Bushee, 1998;Eng & Shackell, 2001). Moreover, institutional ownership serves the monitoring function on management (Edmans, 2009).…”