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How is Moral Hazard Related to Financing R&D and Innovations?

Author

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  • Ozgur Arslan-Ayaydin
  • Darold Barnum
  • Mehmet Baha Karan
  • Atilla Hakan Ozdemir

Abstract

This study investigates which corporate governance and firm-specific characteristics lead firms to be prone to ex-post moral hazard by misallocating the funds that they specifically borrowed for financing their R&D activities. We study 106 firms that received a specially designed loan by a Turkish government to be invested only in R&D and technological innovations. We find that as the size of the loan increases firms are less prone to moral hazard. For family firms our results support the agency theory. For large shareholders, initially our results are aligned with the agency theory but after controlling for the loan size our results hold for the stewardship theory. We also find that as amount of the loans increases relative to size of firms, the performance of projects financed by these loans plummets. Finally, we show that moral hazard related to R&D and innovation activities varies across industries.

Suggested Citation

  • Ozgur Arslan-Ayaydin & Darold Barnum & Mehmet Baha Karan & Atilla Hakan Ozdemir, 2014. "How is Moral Hazard Related to Financing R&D and Innovations?," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 111-131.
    • Handle: RePEc:ers:journl:v:xvii:y:2014:i:4:p:111-131
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    More about this item

    Keywords

    Innovations; R&D; Moral Hazard; Corporate Governance; Agency Theory; Stewardship Theory;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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