Controlling Owners and R&D Investments: Stewardship and Principal-Principal Conflict Perspectives

Abstract

Emerging economies offer an interesting setting in which to examine the effect of corporate governance systems on firms¡¯ decisions. Existing theories often highlight how controlling owners influence decisions regarding long-term value creating activities such as innovation. However, these theories offer contrasting views on the effect of controlling owners in emerging economies where many companies are members of business groups. In this study, we propose that business group affiliation highlights interest incongruence between controlling owners and affiliated firms, motivating controlling owners to behave more opportunistically. Our analysis of Korean companies shows that controlling owners in independent firms promote R&D particularly when growth opportunities are present. These owners exert opposite influences in affiliated firms. The results highlight the need to integrate the stewardship and principal-principal perspectives, each of which only partially explains controlling owners¡¯ influence on R&D investments in these two types of firms.