Title: Corporate governance and market valuation of R&D-based firms: the effect of controlling shareholders and ownership-control discrepancy
Author: Atef Hamdi
Address: Department of Finance and Investment, College of Economics and Administrative Sciences, Al Imam Mohammad Ibn Saud Islamic University (IMSIU), P.O. Box 5701, Riyadh, Saudi Arabia
Abstract: This paper aims to investigate the relationship between ownership structure and the valuation of R&D-based firms by focusing on two mechanisms in a concentrated ownership setting: large controlling shareholders (LCSs) and ownership-control discrepancy. Examining a sample of 143 R&D-companies, this study provides evidence that the market value depends critically on the identity of controllers and excess control. Specifically, our results show that when the LCS is a family that uses a democratic voting rule, the firm value increases; consistent with the incentive effect hypothesis. However, when the family maintains control while holding fewer cash flow rights, the firm value decreases; consistent with the entrenchment effect hypothesis. Additional results provide evidence that, in a concentrated ownership setting, internal and external means of governance have a subordinate role of control. Specifically, our results show a second-order effect of board composition, compensation policy and analysts coverage on the valuation of R&D-based firms.
Keywords: R&D; corporate governance; firm value; performance; ownership structure; shareholder identity; excess control; means of control; research and development; market valuation; controlling shareholders; ownership-control discrepancy; board composition; compensation policy; analyst coverage.
EuroMed J. of Management, 2016 Vol.1, No.3, pp.202 - 223
Submission date: 24 Aug 2015
Date of acceptance: 26 Dec 2015
Available online: 19 Dec 2016