The Effect of R&D and the Control–Ownership Wedge on Firm Value: Evidence from Korean Chaebol Firms

Minjung Kang, Sangil Kim and Moon-Kyung Cho
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Minjung Kang: Department of Tax & Accounting, Incheon National University, 119 Academy-ro, Yeonsu-gu, Incheon City 406-772, Korea
Sangil Kim: Department of Business Administration, Ajou University, 206 Worldcup-ro, Yeongtong-gu, Suwon City 16499, Korea
Moon-Kyung Cho: Division of International Banking & Finance Studies, Texas A&M International University, 5201 University Boulevard, Laredo, TX 78041, USA

Sustainability, 2019, vol. 11, issue 10, 1-20

Abstract: Cases have been reported in which research and development (R&D) investment, the core activity for a firm’s sustainable growth, deteriorate rather than increase firm value. This study illuminates the cause of such cases in terms of the control–ownership wedge. How expensed and capitalized R&D affect firm value are examined separately for cases in which the wedge is high and low. In an analysis of Korean chaebol firms, when the wedge is high, significant negative relationships appear between expensed R&D and firm value, while no significant relationship appears between capitalized R&D and firm value. When the wedge is low, expensed R&D does not show any significant relationship with firm value, while capitalized R&D shows significant positive relationships with firm value. This confirms, first, that in cases of high wedge, suboptimal R&D decisions are made, in which the manager can discretionally determine investment targets or projects. Second, this indicates that even in cases of low wedge, the positive relationship between R&D and firm value does not appear in expensed R&D. This study suggests that investors and regulatory authorities should pay close attention to the initial stage of R&D in firms with high control–ownership wedges for sustainable economic growth.

Keywords: research and development investments; expensed research and development; capitalized research and development; control–ownership wedge; firm value (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:11:y:2019:i:10:p:2986-:d:234423

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