The IUP Journal of Applied Finance
Capital Structure, Ownership Structure and R&D Investments: Evidence from Indian Firms

Article Details
Pub. Date : Jan, 2019
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF31901
Author Name : Amitabh Gupta
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 24

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Abstract

This study examines the relationship among capital structure, ownership structure and R&D investments for Indian firms. The results indicate a positive relationship between R&D intensity and leverage of a firm, implying that Indian firms with high leverage do undertake R&D investments. Contrary to the existing literature, no negative relationship between family ownership and R&D investments is found. There is a negative relationship between institutional ownership and R&D investments, suggesting that institutions have a myopic view and concentrate only on short-term performance of firms. A negative relationship between domestic institutional ownership and R&D investments is also observed, confirming the general belief that domestic financial institutions do not finance innovative firms. Finally, a positive relationship between foreign institutional ownership and R&D investments is found. This confirms that foreign institutional investors do promote R&D spending in Indian firms and that they are dynamic monitors who support firms with innovative ideas and promote exchange of innovative knowledge.


Description

Investment in Research and Development (R&D) has received a great deal of attention from governments, policy makers and academics throughout the world as it is now largely believed that they are the precursors to growth and economic development of countries (Chan et al., 2001). It is not only countries but firms also undertake R&D expenditure in order to sustain, grow and remain viable; this is especially true for firms in R&D-intensive industries (Hill and Snell, 1988; Franko, 1989; and Lau, 1998). Firms have increased R&D spending in order to achieve growth and to have a competitive advantage in the rapidly changing business environment (Kim and Park, 2012). Over the years, with the dependence on technology and its quick obsolescence in business and more so in certain R&D-intensive industries like information technology, automobiles, electronics, pharmaceuticals, etc., the investments in R&D have increased manifold and are even larger than their earnings (Chan et al., 2001). So much so, that the technologically-innovative companies may outperform their competitors (Geroski et al., 1993).


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