This paper seeks to examine the relationship between ownership structure and financial performance of firms, with particular emphasis on the dynamics of the relation between the two. Theory tells us that managerial ownership of shares in a firm generates two conflicting effects on management behavior, i.e., the convergence effect whereby increased ownership can improve corporate performance, and the entrenchment effect, which counters it. A number of studies have sought to evaluate these effects empirically.
The relationship between institutional holding and performance is also taken up for study. Empirically, firm performance is expected to have a positive correlation indicating its active involvement in monitoring management. The idea in this paper is to test the above empirically using Indian data pertaining to chemical industry. R&D expenditures in chemical industries are specific types of investments, in that their
outcomes are neither immediate nor certain. Indeed, R&D expenditures may not result in any
payoff (they may be entirely unproductive) or may translate into profits only after many years.
This uncertainty may make it difficult for investors to know the value of R&D expenditures.
Nonetheless, investment in R&D is crucial for both the survival and growth of firms,
particularly in sectors such as pharmaceuticals and technology. Therefore, decisions regarding
the magnitude and allocation of R&D expenditures are extremely important for corporations.
Such decisions are at the discretion of management. Several researchers have argued that the
expectations of investors, their concern es, and their holding periods can affect
R&D investments. Shorter horizons for stockholders can lead to shorter horizons for managers,
perhaps causing managers to forgo R&D investments.
The short-term behavior of shareholders can pressure managers to overemphasize current
bottom line earnings. For example, profit-conscious investors may become distressed by low
earnings reports (inversely related to the level of R&D investments) and try to sell their stocks.
If many investors sell their stocks at the announcement of low quarterly earnings, the value
of a firm declines. In this way, the behavior of investors is directly related to the short-term
pressures that managers face and may influence their long-term investment decisions.
(Lee and O’Neill, 2003). |
