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Article
Publication date: 23 August 2013

Robert Hull, Rosemary Walker and Sungkyu Kwak

The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change…

1463

Abstract

Purpose

The purpose of this paper is to examine the effects of R&D manipulation on stock valuation for periods around IPOs. Insider manipulation is the difference in actual R&D change minus predicted R&D change where a negative difference indicates R&D underinvestment.

Design/methodology/approach

This study is designed to build on prior IPO research that has found reduced R&D expenditures when insiders lower their ownership. The paper derives an R&D manipulation variable that measures underinvestment in R&D. This variable is used in a regression methodology to test its influence on: IPO stock valuation at various points in time and post‐IPO price changes relative to the offer price.

Findings

The paper discovers that greater underinvestment in R&D is associated with greater values during the IPO stock valuation process. This association is reversed when the paper looks at short‐term valuation based on market prices. Only for bubble period IPOs do the paper finds poorer valuations for the long‐term. Larger insider ownership decreases lead to poorer valuations regardless of the period of occurrence. Greater R&D underinvestment and insider ownership decreases both lead to less underpricing.

Research limitations/implications

Like prior research, the paper assumes that knowledge about the change in R&D is known at the time of the offering. Interpretations for long‐run results can be tenuous due to unexpected changes that occur over time.

Practical implications

Investors should note that managers are able to set higher offer prices when they inflate earnings by underinvesting in R&D. Buying at an inflated offer price with R&D manipulation leads to losses in the aftermarket with these losses associated with IPOs that occur during a bubble period.

Social implications

Misrepresentation during the IPO valuation process affects those who buy shares at inflated prices. This raises ethical questions about the behavior of those involved in the issuance process.

Originality/value

This study is unique in testing how R&D manipulation and changes in insider ownership proportions impact the: IPO valuation process, post‐IPO valuation, and changes in the stock price over time relative to the offer price.

Article
Publication date: 12 February 2018

Tatiana Fedyk and Natalya Khimich

The purpose of this paper is to link valuation of different accounting items to research and development (R&D) investment decisions and investigate how suboptimal R&D choices…

1146

Abstract

Purpose

The purpose of this paper is to link valuation of different accounting items to research and development (R&D) investment decisions and investigate how suboptimal R&D choices during initial public offering (IPO) are linked to future operating and market underperformance.

Design/methodology/approach

For firms with substantial growth opportunities, accounting net income is a poor measure of the firm’s performance (Smith and Watts, 1992). Therefore, other metrics such as R&D intensity are used by investors to evaluate firms’ performance. This leads to a coexistence of two strategies: if earnings are the main value driver, firms tend to underinvest in R&D; and if R&D expenditures are the main value driver, firms tend to overinvest in R&D.

Findings

The authors show that the R&D investment decision varies systematically with cross-sectional characteristics: firms that are at the growth stage, unprofitable or belong to science-driven industries are more likely to overinvest, while firms that are able to avoid losses by decreasing R&D expenditure are more likely to underinvest. Finally, they find that R&D overinvestment leads to future underperformance as evidenced by poor operating return on assets, lower product market share, higher frequency of delisting due to poor performance and negative abnormal stock returns.

Originality/value

While prior literature concentrates on R&D underinvestment as a tool of reporting higher net income, the authors demonstrate the existence of an alternative strategy used by many IPO firms – R&D overinvestment.

Details

Review of Accounting and Finance, vol. 17 no. 1
Type: Research Article
ISSN: 1475-7702

Keywords

Book part
Publication date: 26 July 2008

Ulrich Doraszelski

The literature on R&D races suggests that noncolluding firms invest excessively in R&D. We show that this result depends critically on the winner-take-all assumption. Although…

Abstract

The literature on R&D races suggests that noncolluding firms invest excessively in R&D. We show that this result depends critically on the winner-take-all assumption. Although rents continue to be dissipated once the winner-take-all assumption is relaxed because firms in general fail to provide the optimal R&D effort, the mechanisms behind this rent dissipation change with the degree of patent protection. We then illustrate how the patent system can be used to elicit the optimal R&D effort.

Details

The Economics of Innovation
Type: Book
ISBN: 978-0-444-53255-8

Article
Publication date: 18 August 2022

Mario Ossorio

The aim of this paper is to explore the family firms' propensity to undertake R&D investments after going public, showing how it varies due to the ownership structure.

Abstract

Purpose

The aim of this paper is to explore the family firms' propensity to undertake R&D investments after going public, showing how it varies due to the ownership structure.

Design/methodology/approach

The analysis is based on a sample of 132 French and Italian family and nonfamily IPOs in the period 2013–2018.

Findings

The empirical findings show a positive relationship between the quantity of post-IPO shares retained by family owners and R&D investments. Furthermore, the abovementioned relationship is negatively affected by the generational stage and positively by the presence of a lone founder.

Practical implications

Outside investors of family firms may be assured in buying shares of founding family firms after going public because they are stimulated to undertake R&D investments and therefore create overall value in the long term. Furthermore, external managers of lone-founder and first-generation family firms can adopt innovation investments without fear of being replaced as a consequence of a hostile takeover. Lastly, private equity should support later generation family IPOs, providing them with capital and managerial skills in order to generate value for shareholders.

Originality/value

Past studies have mostly shown family firms' reluctance to undertake R&D investments; however, scholars have focused on private or public family firms, ruling out the analysis of family firms' innovation behaviour within the setting of an IPO. To the best of the author's knowledge, this study represents the first empirical attempt to investigate the relationship between family firms and post-IPO innovation investments, when the capital infusion relaxes the financial constraints of family firms.

Details

European Journal of Innovation Management, vol. 27 no. 2
Type: Research Article
ISSN: 1460-1060

Keywords

Article
Publication date: 13 November 2018

Alessandro Cirillo, Mario Ossorio and Luca Pennacchio

The purpose of this paper is to contribute to innovation and family business literature by establishing whether institutional involvement of private equity (PE) and banks in…

Abstract

Purpose

The purpose of this paper is to contribute to innovation and family business literature by establishing whether institutional involvement of private equity (PE) and banks in family firms moderates the relationship between family ownership and research and development (R&D) investment.

Design/methodology/approach

This paper used the socio-emotional wealth lens to carry out an econometric analysis on a large sample of Italian non-listed family firms. Using the sample selection model meant it was possible to account for potential selection bias arising from firms’ discretionary disclosure of R&D expenditure.

Findings

Family involvement in ownership reduced firms’ R&D intensity. When PE investors also held shares, the negative relationship was diverted. Bank involvement, however, did not have a significant effect on the relationship.

Research limitations/implications

This paper enriches the innovation management literature by increasing the understanding of the determinants of R&D investments in family firms. The results support the view that non-financial priorities in family firms are contingent upon non-family shareholders. This enriches the debate about the heterogeneity of family businesses and is consistent with the socio-emotional wealth framework, which has shown that risk preferences may vary if desired and actual performances are different. This may be a fruitful area for future research.

Originality/value

Contradicting the assumption that institutional owners all share the same perspective, this study is the first to assess the impact of different institutional shareholders on R&D intensity of private family firms.

Details

Management Decision, vol. 57 no. 7
Type: Research Article
ISSN: 0025-1747

Keywords

Article
Publication date: 20 May 2021

Xin Xiang

The purpose of this study is to examine whether and how internal capital markets mitigate financial constraints and enhance firms' willingness to engage in R&D projects.

Abstract

Purpose

The purpose of this study is to examine whether and how internal capital markets mitigate financial constraints and enhance firms' willingness to engage in R&D projects.

Design/methodology/approach

The study uses panel data relating to 2,095 publicly traded firms in the Chinese A-share market for the period 2007–2019. The tobit regression method is applied to explore R&D investment–cash flow sensitivity of group affiliates, while the systematic generalised method of moments and dynamic ordinary least squares models are adopted to address the endogeneity problem in the robustness test.

Findings

This study finds that firms affiliated with business groups demonstrate lower R&D investment–cash flow sensitivity than non-affiliated firms do and that R&D investments are significantly influenced by the cash reserves of other group members. In terms of financing channels, this study demonstrates that group firms use internal cash and equity financing to support other members' R&D investments, while debt financing does not influence member firms' R&D investments. In addition, this study discovers that R&D spending harms the stock and operating performance of some group members.

Practical implications

The findings of this study enable business groups to focus on resource allocation and investment efficiency.

Originality/value

Although prior studies indicate that internal capital markets can enhance R&D spending, few studies reveal the mechanisms through which internal capital markets benefit R&D. This study uses a unique methodology to test the ability of the internal capital market to enhance R&D spending. In addition, group firms use internal cash flow and equity financing to support partners' R&D projects.

Details

International Journal of Emerging Markets, vol. 18 no. 4
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 28 December 2020

Gang Chen, Luke L. Mao, Nathan David Pifer and James J. Zhang

This study investigated the effectiveness and applicability of China’s innovation-driven policies on encouraging sports firms to invest in research and development (R&D

Abstract

Purpose

This study investigated the effectiveness and applicability of China’s innovation-driven policies on encouraging sports firms to invest in research and development (R&D) activities.

Design/methodology/approach

Through a series of multiple linear regression models, this study examined the direct and interaction effects of innovation-driven polices and firm characteristics on R&D investment for sport firms listed on the New Third Board in China.

Findings

Results showed that financing constraints and certification as a high-tech enterprise were not themselves significant predictors of R&D investment; instead, the number of R&D staff and a firm's total assets were identified as key internal factors predicting the level of a firm's R&D investment. Other effective policy tools for stimulating Chinese sport firms' R&D investments included pre-tax deductions of R&D expenses, government R&D subsidies and income tax relief for high-tech enterprises, although their effects were heterogeneous.

Research limitations/implications

This study observes a new theoretical discovery that when the financing constraints do not limit R&D investment, innovation-driven strategies remain effective tools to stimulate the R&D investment of sports firms.

Practical implications

The findings provided practical guidance for both government–industry policymakers and sport business managers to prioritize the identified areas of significance when promoting R&D.

Originality/value

First, this study focused on sport firms, which constitute a quickly growing industrial sector in China. The findings offered important insights for the government as well as corporate management with regard to promoting new industries and new enterprises. Second, this paper analyzed the effects of three special innovation-driven policies on R&D investment and explored enterprise innovation development in more detail. Third, this paper discussed not only the effects of innovation-driven policies on R&D investment but also the heterogeneity of their effects. The related conclusions could help improve the development, implementation and assessment of innovation-driven policies.

Details

Asia Pacific Journal of Marketing and Logistics, vol. 33 no. 7
Type: Research Article
ISSN: 1355-5855

Keywords

Article
Publication date: 7 August 2017

Hsiao-Fen Hsiao, Szu-Lang Liao, Chi-Wei Su and Hao-Chang Sung

Recent studies in the accounting literature have investigated the economic consequences of R&D capitalization. Discretionary R&D capitalization for target beating can be…

Abstract

Purpose

Recent studies in the accounting literature have investigated the economic consequences of R&D capitalization. Discretionary R&D capitalization for target beating can be characterized as a firm signaling private information on its future economic benefits or as opportunistic earnings management. R&D capitalization also has an impact on a firm’s marginal costs and product market competition. The purpose of this paper is to address how firms choose R&D levels for the purpose of meeting or beating their earnings targets and how this influences sequential product market competition.

Design/methodology/approach

The authors study this issue in a stylized game-theoretic model where R&D choices of a firm are not only strategically made but also used to convey proprietary information to its rival. The model provides a rationale for a firm distorting its R&D level to earn more profits and meet its earnings target.

Findings

The equilibrium result indicates that before the realization of common cost shock, a firm can influence the output of its accounting system (i.e. meeting an earnings target) through adjusting its R&D choices. This firm will overinvest in R&D, and this will give an opportunity to create some reserves to be used later to earn a higher profit and reach the earnings target.

Originality/value

This paper contributes to the research on real earnings management in terms of how R&D capitalization affects a firm’s R&D choices by influencing the output of its accounting system through adjusting its R&D choices and the strategic impact of those choices.

Details

International Journal of Accounting & Information Management, vol. 25 no. 3
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 1 July 1998

Fariborz Moshirian

This paper categorises environmental damage as local, national, transfrontier and international in nature. It argues that since the developed countries’ environmental protection…

1567

Abstract

This paper categorises environmental damage as local, national, transfrontier and international in nature. It argues that since the developed countries’ environmental protection policies aimed at reducing the level of carbon dioxide in the atmosphere will be offset by the expansion of industrialisation in the less developed countries, the key to protecting the global environment is technological advancement by which the world community can raise the efficiency of the current energy usage and/or develop feasible alternative sources of energy so that the consumption of fossil fuel can be minimised. Furthermore, this paper argues that national institutions promote mainly R&D and technological changes in areas which will ensure national supremacy over other nations, in the areas of either trade and/or military and prestige rivalries and hence international treaties for protection of the global environment attempted thus far will continue to be incapable of significantly protecting the planet from global environmental damage, unless and until an authorised international institution for the global environment is established.

Details

International Journal of Social Economics, vol. 25 no. 6/7/8
Type: Research Article
ISSN: 0306-8293

Keywords

Article
Publication date: 1 April 1996

Peter Hall

Asks how hard should a small natural resource‐rich (NRR) country try to escape from a path of economic development which has been shaped by its physical resource endowments, a…

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Abstract

Asks how hard should a small natural resource‐rich (NRR) country try to escape from a path of economic development which has been shaped by its physical resource endowments, a question relevant to Clem Tisdell’s own country, Australia and also New Zealand and Canada, among others. Comments on the perception that a country well endowed with all manner of natural resources may nonetheless not be making as much of its opportunities as it could. Looks at what is actually happening in Australia, questions whether it is a worry and if so, what should policy makers do?

Details

International Journal of Social Economics, vol. 23 no. 4/5/6
Type: Research Article
ISSN: 0306-8293

Keywords

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