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Do Institutional Investors Aleviate Agency Costs in R&D Investment Decisions?

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  • Ricky William Scott

Abstract

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.

Suggested Citation

  • Ricky William Scott, 2017. "Do Institutional Investors Aleviate Agency Costs in R&D Investment Decisions?," Accounting and Finance Research, Sciedu Press, vol. 6(3), pages 1-24, August.
    • Handle: RePEc:jfr:afr111:v:6:y:2017:i:3:p:24
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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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