Agency Costs, Management Stockholding, and Research and Development Expenditures

This paper examines the relationship between management stockholding and the level of R&D expenditures of a firm. Agency theory implies that a manager is reluctant to undertake R&D projects. Considering that management stockholding generally works to reduce agency problems between shareholders and managers, we can expect a certain relationship between management stockholding and R&D intensity, although the theory fails to predict a monotonous relationship between these two. Empirical results show that R&D intensity rises as the importance of management stockholding increases in the manager's personal wealth. These results are consistent with the agency theory that management stockholding reduces agency problem.