IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i10p2986-d234423.html
   My bibliography  Save this article

The Effect of R&D and the Control–Ownership Wedge on Firm Value: Evidence from Korean Chaebol Firms

Author

Listed:
  • Minjung Kang

    (Department of Tax & Accounting, Incheon National University, 119 Academy-ro, Yeonsu-gu, Incheon City 406-772, Korea)

  • Sangil Kim

    (Department of Business Administration, Ajou University, 206 Worldcup-ro, Yeongtong-gu, Suwon City 16499, Korea)

  • Moon-Kyung Cho

    (Division of International Banking & Finance Studies, Texas A&M International University, 5201 University Boulevard, Laredo, TX 78041, USA)

Abstract

Cases have been reported in which research and development (R&D) investment, the core activity for a firm’s sustainable growth, deteriorate rather than increase firm value. This study illuminates the cause of such cases in terms of the control–ownership wedge. How expensed and capitalized R&D affect firm value are examined separately for cases in which the wedge is high and low. In an analysis of Korean chaebol firms, when the wedge is high, significant negative relationships appear between expensed R&D and firm value, while no significant relationship appears between capitalized R&D and firm value. When the wedge is low, expensed R&D does not show any significant relationship with firm value, while capitalized R&D shows significant positive relationships with firm value. This confirms, first, that in cases of high wedge, suboptimal R&D decisions are made, in which the manager can discretionally determine investment targets or projects. Second, this indicates that even in cases of low wedge, the positive relationship between R&D and firm value does not appear in expensed R&D. This study suggests that investors and regulatory authorities should pay close attention to the initial stage of R&D in firms with high control–ownership wedges for sustainable economic growth.

Suggested Citation

  • Minjung Kang & Sangil Kim & Moon-Kyung Cho, 2019. "The Effect of R&D and the Control–Ownership Wedge on Firm Value: Evidence from Korean Chaebol Firms," Sustainability, MDPI, vol. 11(10), pages 1-20, May.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:10:p:2986-:d:234423
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/10/2986/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/10/2986/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, vol. 57(6), pages 2741-2771, December.
    2. Dechow, Patricia M. & Sloan, Richard G., 1991. "Executive incentives and the horizon problem : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 51-89, March.
    3. Paul A. Gompers & Joy Ishii & Andrew Metrick, 2010. "Extreme Governance: An Analysis of Dual-Class Firms in the United States," NBER Chapters, in: Corporate Governance, National Bureau of Economic Research, Inc.
    4. Almeida, Heitor & Campello, Murillo & Weisbach, Michael S., 2011. "Corporate financial and investment policies when future financing is not frictionless," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 675-693, June.
    5. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-1280, December.
    6. Michael L. Lemmon & Karl V. Lins, 2003. "Ownership Structure, Corporate Governance, and Firm Value: Evidence from the East Asian Financial Crisis," Journal of Finance, American Finance Association, vol. 58(4), pages 1445-1468, August.
    7. Jaimin Goh & Wonwook Choi & Jungeun Cho, 2016. "Changes in chaebol firms’ overinvestment after the Asian financial crisis: a long-term perspective," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 23(1), pages 75-111, March.
    8. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 121-148.
    9. Allayannis, George & Weston, James P, 2001. "The Use of Foreign Currency Derivatives and Firm Market Value," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 243-276.
    10. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    11. Joseph P. H. Fan & T. J. Wong, 2005. "Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia," Journal of Accounting Research, Wiley Blackwell, vol. 43(1), pages 35-72, March.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    14. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
    15. Francis, J & Schipper, K, 1999. "Have financial statements lost their relevance?," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 319-352.
    16. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    17. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
    18. Aboody, D & Lev, B, 1998. "The value relevance of intangibles: The case of software capitalization," Journal of Accounting Research, Wiley Blackwell, vol. 36, pages 161-191.
    19. Ming‐Yuan Leon Li & Nen‐Chen Richard Hwang, 2011. "Effects of Firm Size, Financial Leverage and R&D Expenditures on Firm Earnings: An Analysis Using Quantile Regression Approach," Abacus, Accounting Foundation, University of Sydney, vol. 47(2), pages 182-204, June.
    20. Jeong†Bon Kim & Cheong H. Yi, 2006. "Ownership Structure, Business Group Affiliation, Listing Status, and Earnings Management: Evidence from Korea," Contemporary Accounting Research, John Wiley & Sons, vol. 23(2), pages 427-464, June.
    21. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    22. Chan, Su Han & Martin, John D. & Kensinger, John W., 1990. "Corporate research and development expenditures and share value," Journal of Financial Economics, Elsevier, vol. 26(2), pages 255-276, August.
    23. Ahmed, Kamran & Falk, Haim, 2006. "The value relevance of management's research and development reporting choice: Evidence from Australia," Journal of Accounting and Public Policy, Elsevier, vol. 25(3), pages 231-264.
    24. repec:bla:jfinan:v:58:y:2003:i:3:p:1301-1327 is not listed on IDEAS
    25. Franzen, Laurel & Radhakrishnan, Suresh, 2009. "The value relevance of R&D across profit and loss firms," Journal of Accounting and Public Policy, Elsevier, vol. 28(1), pages 16-32.
    26. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
    27. Marta Ballester & Manuel Garcia-Ayuso & Joshua Livnat, 2003. "The economic value of the R&D intangible asset," European Accounting Review, Taylor & Francis Journals, vol. 12(4), pages 605-633.
    28. Lins, Karl V., 2003. "Equity Ownership and Firm Value in Emerging Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(1), pages 159-184, March.
    29. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
    30. Ciftci, Mustafa & Cready, William M., 2011. "Scale effects of R&D as reflected in earnings and returns," Journal of Accounting and Economics, Elsevier, vol. 52(1), pages 62-80, June.
    31. Kee‐Hong Bae & Jun‐Koo Kang & Jin‐Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
    32. Ronald W. Masulis & Cong Wang & Fei Xie, 2009. "Agency Problems at Dual‐Class Companies," Journal of Finance, American Finance Association, vol. 64(4), pages 1697-1727, August.
    33. Allayannis, George & Ofek, Eli, 2001. "Exchange rate exposure, hedging, and the use of foreign currency derivatives," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 273-296, April.
    34. Callen, Jeffrey L. & Morel, Mindy, 2005. "The valuation relevance of R&D expenditures: Time series evidence," International Review of Financial Analysis, Elsevier, vol. 14(3), pages 304-325.
    35. Bhagat, Sanjai & Welch, Ivo, 1995. "Corporate research & development investments international comparisons," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 443-470, April.
    36. Lev, B & Zarowin, P, 1999. "The boundaries of financial reporting and how to extend them," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 353-385.
    37. Ronald C. Anderson & David M. Reeb, 2003. "Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1328, June.
    38. Jiang, Li & Kim, Jeong-Bon & Pang, Lei, 2011. "Control-ownership wedge and investment sensitivity to stock price," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2856-2867, November.
    39. Han, Bong H. & Manry, David, 2004. "The value-relevance of R&D and advertising expenditures: Evidence from Korea," The International Journal of Accounting, Elsevier, vol. 39(2), pages 155-173.
    40. Gary J. Young & Martin P. Charns & Stephen M. Shortell, 2001. "Top manager and network effects on the adoption of innovative management practices: a study of TQM in a public hospital system," Strategic Management Journal, Wiley Blackwell, vol. 22(10), pages 935-951, October.
    41. Bruce A. Blonigen & Christopher T. Taylor, 2000. "R&D Intensity and Acquisitions in High‐Technology Industries: Evidence from the US Electronic and Electrical Equipment Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 48(1), pages 47-70, March.
    42. Wei, K.C. John & Zhang, Yi, 2008. "Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 118-132, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yi Yang & Shuhe Shi & Jingjing Wu, 2022. "Digital Financial Inclusion to Corporation Value: The Mediating Effect of Ambidextrous Innovation," Sustainability, MDPI, vol. 14(24), pages 1-23, December.
    2. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah,, 2023. "Internal pyramid structure, judicial efficiency, firm-level governance and dividend policy," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 764-785.
    3. Musaab Mousa & Saeed Nosratabadi & Judit Sagi & Amir Mosavi, 2021. "The Effect of Marketing Investment on Firm Value and Systematic Risk," Papers 2104.14301, arXiv.org.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:dau:papers:123456789/5922 is not listed on IDEAS
    2. Kang, Minjung & Lee, Ho-Young & Lee, Myung-Gun & Park, Jong Chool, 2014. "The association between related-party transactions and control–ownership wedge: Evidence from Korea," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 272-296.
    3. Zeineb Barka & Taher Hamza, 2020. "The effect of large controlling shareholders on equity prices in France: monitoring or entrenchment?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 24(3), pages 769-798, September.
    4. Khosa,Amrinder & Ahmed,Kamran & Henry,Darren, 2019. "Ownership Structure, Related Party Transactions, and Firm Valuation," Cambridge Books, Cambridge University Press, number 9781108492195, November.
    5. Richardson, Grant & Wang, Bei & Zhang, Xinmin, 2016. "Ownership structure and corporate tax avoidance: Evidence from publicly listed private firms in China," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(2), pages 141-158.
    6. Sumon Kumar Bhaumik & Andros Gregoriou, 2010. "‘Family’ Ownership, Tunnelling And Earnings Management: A Review Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 705-730, September.
    7. Najah Attig & Sadok El Ghoul & Omrane Guedhami & Sorin Rizeanu, 2013. "The governance role of multiple large shareholders: evidence from the valuation of cash holdings," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 17(2), pages 419-451, May.
    8. Bernard Yeung & Randall Morck & Daniel Wolfenzon, 2004. "Corporate Governance, Economic Entrenchment and Growth," Working Papers 04-21, New York University, Leonard N. Stern School of Business, Department of Economics.
    9. Caixe, Daniel Ferreira & Kalatzis, Aquiles Elie Guimarães & Castro, Luiz Ricardo Kabbach de, 2019. "Controlling shareholders and investment-risk sensitivity in an emerging economy," Emerging Markets Review, Elsevier, vol. 39(C), pages 133-153.
    10. Feng, Xunan & Hu, Na & Johansson, Anders C., 2016. "Ownership, analyst coverage, and stock synchronicity in China," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 79-96.
    11. Imen Derouiche & Majdi Hassan & Sarra Amdouni, 2018. "Ownership structure and investment-cash flow sensitivity," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 22(1), pages 31-54, March.
    12. Juan Manuel San Martín Reyna, 2012. "An Empirical Examination of Ownership Structure, Earnings Management and Growth Opportunities in Mexican Market," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(7), pages 103-123, December.
    13. Luc Laeven & Ross Levine, 2008. "Complex Ownership Structures and Corporate Valuations," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 579-604, April.
    14. Agarwal, Anushka & Chaudhry, Neeru, 2022. "Foreign controlling shareholders and corporate investment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    15. Juan M. San Martin-Reyna & Jorge A. Durán-Encalada, 2012. "Ownership Structure, Earnings Management and Investment Opportunity Set: Evidence from Mexican Firms," Journal of Entrepreneurship, Management and Innovation, Fundacja Upowszechniająca Wiedzę i Naukę "Cognitione", vol. 8(3), pages 35-57.
    16. Fuxiu Jiang & Kenneth A Kim, 2020. "Corporate Governance in China: A Survey [The role of boards of directors in corporate governance: a conceptual framework and survey]," Review of Finance, European Finance Association, vol. 24(4), pages 733-772.
    17. Kabbach-de-Castro, Luiz Ricardo & Kalatzis, Aquiles Elie Guimarães & Pellicani, Aline Damasceno, 2022. "Do financial constraints in an unstable emerging economy mitigate the opportunistic behavior of entrenched family owners?," Emerging Markets Review, Elsevier, vol. 50(C).
    18. Hsu, Audrey Wen-hsin & Liu, Sophia Hsin-Tsai, 2016. "Organizational structure, agency costs, and accrual quality," Journal of Contemporary Accounting and Economics, Elsevier, vol. 12(1), pages 35-60.
    19. Ferrell, Allen & Liang, Hao & Renneboog, Luc, 2016. "Socially responsible firms," Journal of Financial Economics, Elsevier, vol. 122(3), pages 585-606.
    20. Attiya Y. Javid & Robina Iqbal, 2010. "Corporate Governance in Pakistan : Corporate Valuation, Ownership and Financing," Governance Working Papers 22830, East Asian Bureau of Economic Research.
    21. Wei, K.C. John & Zhang, Yi, 2008. "Ownership structure, cash flow, and capital investment: Evidence from East Asian economies before the financial crisis," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 118-132, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:11:y:2019:i:10:p:2986-:d:234423. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.