RandD Investment Decisions in Business Groups: Evidence from a Natural Experiment

Research Question/Issue: This paper examines R&D investment decisions in firms under a pyramidal ownership structure in the context of South Korea. Research Findings/Insights: Using the Monopoly Regulation and Fair Trade Act, which places limits on group affiliates' equity investments, we provide new evidence that controlling owners tend to increase long-term R&D expenditures more in firms that are largely subject to the equity investment regulation in South Korea. Moreover, this result is more significant for firms for which the owners have low cash-flow rights, firms located in the lower layers of the pyramid, and firms that hold less equity shares than do other group affiliates. Theoretical/Academic Implications: This study contributes to the literature that focuses on R&D investment decisions by providing empirical support regarding how firms' relative status within their business group influences the firms' R&D investment decisions in South Korea. Practitioner/Policy Implications: This study provides important insight into the positive policy implications of the equity investment regulation on R&D investments for Korean business groups.