Managerial Ownership, Entrenchment and Innovation

31 Pages Posted: 21 Jun 2011

See all articles by Mila Beyer

Mila Beyer

KU Leuven; ZEW – Leibniz Centre for European Economic Research

Dirk Czarnitzki

Centre for European Economic Research (ZEW); Catholic University of Leuven (KUL)

Kornelius Kraft

University of Dortmund - Department of Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2011

Abstract

Principle-agent theory suggests managers might under-invest into R&D for reasons of risk tied to project failure, such as reduced remuneration and job loss. However, managers might over-invest into innovation for reasons of growth implying higher remuneration, power and prestige. Using a sample of 1,406 Belgian firms, we find, first, that managers holding no company shares under-invest into R&D compared to owners giving rise to the risk argument.

Second, we find an inverse u-shaped relationship between the degree of managerial ownership and R&D. Thus, managers become entrenched, i.e. powerful enough to pursue their own interests. When entrenched, managers do not fear detrimental effects of risky innovation projects on their career, and hence tend to over-invest into innovation.

Keywords: Corporate governance, managerial ownership, entrenchment, innovation, R&D investments

JEL Classification: G32, O31, O32

Suggested Citation

Beyer, Mila and Czarnitzki, Dirk and Kraft, Kornelius, Managerial Ownership, Entrenchment and Innovation (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1868845 or http://dx.doi.org/10.2139/ssrn.1868845

Mila Beyer (Contact Author)

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Dirk Czarnitzki

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
Mannheim, 68034
Germany

Catholic University of Leuven (KUL) ( email )

Faculty of Economics and Business
Naamsestraat 69
Leuven, 3000
Belgium
+32 16 326906 (Phone)
+32 16 325799 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/msi/faculty_members.htm

Kornelius Kraft

University of Dortmund - Department of Economics ( email )

D-44221 Dortmund
Germany
+49 231 755-3152 (Phone)
+49 231 755-3155 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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