Indexed on: 15 Jan '17Published on: 20 Dec '16Published in: EuroMed Journal of Management
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.