How Do Ownership Concentration and Family Control Affect R&D Investments? New Evidence from Taiwan

• Published date: 01 March 2020
• Author: Huai‐Chun Lo,Qian Long Kweh,Irene Wei Kiong Ting
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/irfi.12206

How Do Ownership Concentration

and Family Control Affect R&D

Investments? New Evidence from

Taiwan*

IRENE WEI KIONG TING

†,‡

,HUAI-CHUN LO

§

AND QIAN LONG KWEH

¶

†

Benchmarking Research Group, Faculty of Accounting, Ton Duc Thang University,

Ho Chi Minh City, Vietnam

‡

Faculty of Industrial Management, Universiti Malaysia Pahang, Gambang, Malaysia

§

Division of Finance, College of Management, Yuan Ze University, Taoyuan,

Taiwan and

¶

Faculty of Management, Canadian University Dubai, Dubai, United Arab Emirates

ABSTRACT

This study finds a nonlinear relationship between ownership concentration

and R&D investments. Specifically, ownership concentration is positively

related to R&D investments at a low level of ownership concentration; the

relationship becomes negative when ownership concentration is at a high

level. However, the impact of ownership concentration on R&D investments

is lessened in family-controlled firms; that is, family control moderates the

relationship between ownership concentration and R&D investments. Over-

all, this study suggests that the ownership concentration’s nonlinear impact

on R&D investments differs between family-controlled firms and nonfamily-

controlled firms.

Accepted: 29 May 2018

I. INTRODUCTION

Research and development (R&D) is vital to creating knowledge and innovation

activities, which in turn generate competitive advantage for firms. Prior studies

indicate that ownership concentration affects a firm’s R&D investments; how-

ever, findings on the nature of this effect are inconclusive. Baysinger

et al. (1991) find a positive relationship, while Zeng and Lin (2011) and Rapp

and Udoieva (2016) find a negative relationship. Admati et al. (1994) indicate

that an increase of ownership concentration aligns the interests of blockholders

with corporate control with those of minority shareholders, while Claessens

* We would like to thank Ministry of Science and Technology of Taiwan (MOST 105-2410-H-

155-012 -) and Universiti Malaysia Pahang (University Grant Scheme RDU1703126) for their finan-

cial supports.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:1, 2020: pp. 275–291

DOI: 10.1111/irfi.12206

et al. (2008) argue that shareholders with concentrated ownership may pursue

self-interests at the expense of minority shareholders. Thus, whether or not

ownership concentration is beneficial for R&D investments depends on its

level. This study calls into question the apparently intuitive conclusion of prior

studies about whether or not there is a nonlinear relationship between owner-

ship concentration and R&D investments. Since family-controlled firms tend to

be more heterogeneous than nonfamily-controlled firms, as argued by Chris-

man and Patel (2012) and Martínez and Requejo (2017), this study shows how

family control moderates the relationship between ownership concentration

and R&D investments.

After addressing the endogeneity issue of ownership concentration based on

Lee and O’Neill (2003) and Chen et al. (2014), our empirical results indicate

that R&D investments increase along with ownership concentration up to a

critical point, after which the relationship turns negative. Admati et al. (1994)

find that blockholders with concentrated ownership may make long-term-

oriented decisions, which may explain the positive relationship at a low level

of ownership concentration. When ownership concentration is high, however,

our result suggests that firms are more reluctant to make R&D investments. This

result is consistent with the argument of Dilling-Hansen et al. (2003) and La

Porta et al. (2000) that blockholders become risk-averse due to self-interests

once a mass of blockholders’wealth is highly concentrated in a firm.

In addition, using family control as a moderator, we find a significant moder-

ating effect of family control on the ownership–R&D investment relationship.

Specifically, we find an inverse U-shaped, or nonlinear, relationship between

ownership concentration and R&D investments for nonfamily-controlled firms.

However, the inverse U-shaped relationship is less pronounced among family-

controlled firms because family owners, who are tied by marriage or blood,

normally make business decisions based on family bonds; besides, the family

shareholders, whose wealth are highly concentrated in the firm, tend to be con-

servative and risk-averse (Schulze et al. 2003; Chang et al. 2006; Graves and

Thomas 2006).

The findings of this study are robust to a battery of tests in the Taiwanese

context. Taiwan is particularly well-suited for this study for two reasons. First,

Taiwan is well-known for having an environment that encourages corporate

R&D investments, contributing to its consistently high levels of economic

growth. In the 2016 Global Innovation 1000 Study, the R&D spending of Tai-

wanese firms is reported to total NT$392.8 billion (US$12.4 billion), approxi-

mately 3% of their combined revenue.

1

Second, Claessens et al. (2000) and Yeh

et al. (2001) indicate that high levels of ownership are concentrated in the

hands of Taiwanese public-listed family-controlled firms. The control structure

in Taiwan, wherein blockholders are influential on firms’strategic decisions,

enables us to investigate the distinct effects of ownership concentration on R&D

investments and obtain insights into family-controlled firms throughout Asia.

1 Source: https://www.pwc.tw/zh/publications/assets/2016-global-innovation-1000-taiwan.pdf

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