Ownership composition and R&D risk-taking

Troyer, C and Ahuja, G (2015) Ownership composition and R&D risk-taking. [Conference proceeding]

Abstract

In this paper, we examine how the ownership composition of publicly traded firms influences risk-taking in one element of R&D strategy: search scope. We connect the investment style of a given shareholder to a strategy for monitoring R&D activity, and we then show how the shareholder’s monitoring strategy translates into managerial incentives with respect to R&D strategy and risk. We focus on institutional investors and posit that quasi-index institutional investors incentivize less risk-taking due to their focus on patenting as a signal of managerial effort in R&D. Dedicated institutional investors, on the other hand, enable risk- taking by pursuing the higher-cost monitoring strategy of relationship investing. Our work indicates that while long-term oriented investors may support R&D investment, a large segment of long-term oriented investors – quasi-index institutional investors – may also incentivize a conservative R&D strategy that eschews risk-taking in favor of predictable outcomes. We suggest that the key managerial problem with respect to shareholders and R&D is the following: either attract the type of shareholder willing to pursue a high-cost monitoring strategy, or develop a signal of managerial effort that satisfies shareholders while shifting the focus away from frequent and predictable R&D outcomes.