THE RELATION BETWEEN CASH HOLDINGS AND R&D EXPENDITURES ACCORDING TO OWNERSHIP STRUCTURE

Transcription

1 Eurasian Business Review, 2(2), 202, THE RELATION BETWEEN CASH HOLDINGS AND R&D EXPENDITURES ACCORDING TO OWNERSHIP STRUCTURE Hyuna Kim * and Sun-Young Park ** Absrac: In his paper, we examine how he cash holdings have an impac on R&D expendiures and wheher he ownership mechanisms moderae he R&D expendiures- he resource of inernal funds relaionship. The resul showed ha cash holdings have a posiively relaionship wih R&D expendiures. Specially, we found ha insiuional ownership had a posiive moderaing effec of he R&D expendiures-he resource of inernal funds relaionship. In addiional analysis, he large business group and he share of managers doesn moderae he relaionship beween cash holdings and R&D expendiures. These resuls provide ha insiuional invesor in Korea end o be long-erm oriened, acive and sophisicaed invesor. They are less likely o evaluae corporae execuives on he basis of shor-erm earnings alone and are more likely o suppor valuecreaing. Keywords: Cash Holdings, R&D Expendiures, R&D Invesmens, Ownership Mechanisms, Ownership Srucure. Inroducion These days, corporaions have increased R&D invesmens in order o achieve coninuous economic growh and compeiiveness in he rapidly changing managemen environmen and unlimied compeiion. Prior sudies sugges ha here is posiive correlaion beween he R&D invesmens and economic growh rae (Romer, 990; Lucas, 988). These findings raise he furher ineres of wheher R&D expendiures are associaed wih firm performance. Various ownership mechanisms have been idenified o help ensure ha managers make sraegic corporae decisions such as R&D invesmens in ways ha enhance shareholder value. Prior sudies have examined ha how he inernal and exernal funds and liquidiy of company affec R&D expendiures and how he ownership mechanisms affec decision makings abou invesmen. However, researchers argue wheher he ownership srucures indirecly affec he R&D expendiures-he resource of inernal funds relaionship. In his paper, we examine how he cash holdings have an impac on R&D expendiures and wheher he ownership mechanisms moderae R&D expendiures-he resource of inernal funds relaionship. We drew our sample firms ha were lised on he Korea Sock Exchange (KSE) and colleced daa for he years 2005 o 200. We used he KIS-VALUE daabase o gaher financial daa. Firms wih missing for * Corresponding Auhor: School of Business Adminisraion, Kyungpook Naional Universiy, Souh Korea. bellekha@naver.com ** School of Business Adminisraion, Kyungpook Naional Universiy, Souh Korea. parksysy@knu.ac.kr

2 one or more years during he sudy period were excluded, resuling in,675 firms (year) for which all informaion was colleced. The resul showed ha cash holdings have a posiively relaionship wih R&D expendiures. Specially, we found ha insiuional invesor had a posiive moderaing effec of he resource of inernal funds-r&d expendiures relaionship. We have aemped o empirically demonsrae he moderaing effec of he relaionship beween cash holdings and R&D expendiures. Prior sudies have no disinguished he moderaing effec. Mos sudies have examined only he relaionship beween cash holdings and R&D expendiures. The res of his paper is srucured as follows. In secion 2, we reviewed he lieraure regarding aspecs of ownership srucure of R&D expendiures and he source of funding o R&D expendiures. We proposed he hypoheses abou he moderaing effecs of differen ypes of owners on he relaionship beween cash holdings and R&D expendiures. In secion 3, we designed he research and in secion 4, we did he empirical es and presened he resuls. Finally, we concluded wih implicaions and poined ou he direcions for fuure research. 2. Theoreical Background and Hypoheses 2.. Lieraure Review Since his paper aims o invesigae he moderaing affecs of differen ypes of owners on he relaionship beween cash holdings and R&D expendiures. In he following pars we will review he lieraure regarding aspecs of ownership srucure of R&D expendiures and he source of funding o R&D expendiures. According o resource-based view, he resources a firm possesses decide is sraegy. Financial facors such as financial slack have been considered as imporan resources in deermining firm s R&D invesmen. Sharfman e al. (988) simplified heir classificaion and idenified slack resources from high discreion o low discreion. According o he perspecive from Cyer and March (963), i is definiely he case ha slack promoes R&D aciviies. Many empirical sudies have showed suppors for i. Singh (986) repored ha boh absorbed and unabsorbed slack have a posiive relaionship wih risk aking projecs. Zajac and Bazerman (99) repored ha he facors ha migh enhance innovaion in inernal corporae join venure. And hey found ha organizaional slack is posiively relaed o innovaiveness. However, oher researchers claim ha slack is kind of unnecessary cos and is no conducive o innovaion. Thus, his view predics negaive relaionship beween slack and R&D invesmens. Nohria and Gulai (996) reconciled above conradicive views by arguing ha here is an inverse U- shaped relaionship beween slack and innovaion. Kim e al. (2008) provide furher evidence for Korean firms ha he relaionship beween slack and R&D invesmens is curvilinear. Therefore, hese sudies showed 26

3 ha cerain amoun of slack resources is needed for innovaion while oo much slack indicaes wased of resources. Ownership srucure is he basis of corporae governance (Williamson and Mellanby, 963). Several sudies have been done on he effecs of ownership srucure on firm performance, capial srucure and oher aspecs. So, R&D invesmens are imporan research sudying in his area. Many sudies mainly use agency heory o invesigae he influences of ownership srucure on R&D invesmens. Agency problem occurs because of ineress conflic and informaion asymmery beween owners and managers (Fama and Jensen, 983; Eisenhard, 989). Therefore, previous researchers link R&D invesmens wih ownership srucure in erms of incenive misalignmen and informaion asymmery (Lee and O Neill, 2003). Mos of sudies have been repored ha relaionship beween ownership and R&D invesmens. Drucker (986), Miroff (987) and Scherer (986) held he view ha insiuional invesor are shor-erm oriened which lead o heir myopic invesmen sraegy. However, Jarrell e al. (985) indicaed he opposie. Graves (988) found ha increased insiuional invesor ownership decreases R&D invesmens. Hoskisson e al. (2002) provided one persuasive argumen ha differen ypes of insiuional invesors have differen invesmen horizons. Block and Thams (2007) didn find evidence ha family firms are more long-erm oriened. Bu Kim e al. (2008) found ha conrolling owners promoe R&D invesmens. Therefore, more empirical sudies need o be done o discern he role of conrolling owners on R&D invesmens Hypoheses Developmen Alhough exising lieraure indicaed wo conrary views on he role of financial slack on innovaion, namely promoing innovaion and wases of resources, hey have he same implicaion on he relaionship beween financial slack and R&D expendiures. Slack resources allow firms o ake more experimenaion and engage in more R&D aciviies (Bourgeois, 98). This view suppors he argumens ha more financial slack would lead o more R&D expendiures. We form he following hypohesis Hypohesis : Cash holdings are posiively associaed wih R&D expendiures. The relaionship beween cash holdings and R&D expendiures migh differ depending on he ownership srucure of corporae. In general, ouside owners suffer from informaional and conrol disadvanages unlike inside owners (Williamson, 975). Noneheless, insiuional invesors may be sophisicaed and acive invesor compared o individual invesors. Indeed, domesic insiuional invesors have srong incenives o incur he cos of monioring firms because hey ofen hold subsanial ownership blocks in firms (Kim e al. 2008). Foreign invesors in emerging economies end o be predominanly insiuional invesors from U.S. and European 27

4 financial insiuions (Choe e al. 999). Before IMF in 997, foreign invesors in Korea were no had own more han 7% of shares in a domesic Korea firms. However, since IMF, such resricions have been removed. So, he share of foreign owners has been increased. These foreign owners now exercise a larger influence on he corporae governance sysem han ever before (Joh, 2003; Gillan and Sarks, 2003). In developed economies, insofar as insiuional invesors are acive as well as sophisicaed invesors, hey are less likely o evaluae corporae execuives on he basis of shor-erm earnings alone and are more likely o suppor value-creaing, long-erm projecs (Kochhar and David, 996; Hansen and Hill, 99; Baysinger e al. 99). In he same view, long-erm expendiures such as R&D are posiively relaed o foreign owner (David e al. 2006). Bu in emerging economies, domesic insiuional invesor and foreign invesors end o be shor-erm oriened because of he poor proecion ha hey receive (La Pora e al. 2000). Facing he expropriaion hazard by conrolling shareholders, hese ouside invesor may prefer o obain immediae gains hrough dividends from financial slack (Easerbrook, 984; Jensen, 989; La Pora e al. 2002; Shefrin and Saman, 984). Thus, we sugges he following hypoheses for esing for moderaing effecs foreign ownership and insiuional ownership may have on he associaion of cash holdings and R&D expendiures. Hypohesis 2-: Foreign ownership moderaes he relaionship beween cash holdings and R&D expendiures. Hypohesis 2-2: Insiuional ownership moderaes he relaionship beween cash holdings and R&D expendiures. 3. Research Design We examine how he cash holdings have an impac on R&D expendiures and wheher he ownership srucures moderae beween he R&D expendiures and cash holdings. So, we es moderae regression. Sharma e al. (98) propose a moderaor ypology for disinguishing moderaors by using wo dimensions, illusraed by he following regression equaion Figure. Model : Y = β 0 + β X + ε Model 2: Y = β 0 + β X + β 2 Z + ε Model 3: Y = β 0 + β X + β 2 Z + β 3 XZ +ε Figure. Tes of moderae regression Where Y is he dependen variable, X is he independen or predicor variable and Z is he suspeced moderaor variable. If in model 2 and 3, β 2 is significan and β 3 is no significan, moderae variable Z is independen variable. I represens a variable ha does no inerac wih he 28

5 independen variables bu is relaed o eiher he independen or dependen variable. If in model 2 and 3, β 2 and β 3 is significan, moderae variable Z is Quasi-moderaor. I represens a variable ha inerac wih he independen variables and is relaed o eiher he independen or dependen variable. If in model 2, β 2 is no significan, in model 3, β 3 is significan, moderae variable Z is pure moderaor. I represens a variable ha inerac wih he independen variables bu is no relaed o eiher he independen or dependen variable. If in model 2, β 2 is no significan, in model 3, β 3 is no significan, moderae variable Z is no moderaor. I represens a variable ha does no inerac wih he independen variables bu is no relaed o eiher he independen or dependen variable. I significan differences are found in he subgroups es, he variable is a homologizer (Le e al. 2006). Firs, we es wheher cash holdings is posiing associaed wih R&D expendiures, specifically we esimae he following model. RD CASH 6 0 ROA 7 TANGI MB 2 SALES 3 SIZE 4 LEV 5 () where: RD : R&D inensiy CASH : Cash holdings MB : Fuure invesmen opporuniies SALES : Growh rae of sales SIZE : Firm size LEV : Leverage raio ROA: Reurn on asses TANGI : Tangible asses invesmens In his equaion, RD is he R&D inensiy ha was measured by he raio of R&D expendiure o sales. We include cash holdings as an independen variable, measured as he raio of quick asses (cash and markeable securiies) o oal asses. For conrol variables, we conrol for fuure invesmen opporuniies, growh rae of sales, firm size, leverage raio, reurn on asses, and angible asses invesmens. MB is he fuure invesmen opporuniies. This is calculaed as (Toal liabiliy + Marke capial)/toal asses. SALES is growh rae of sales and SIZE is measured using naural log oal asses. LEV leverage raio ha measured oal deb divided by oal asses. ROA is a reurn of asses ha measured as repored earnings divided by oal asses. TANGI proxies for reduced funds available for invesmen and/or enry ino a more maure, lower invesmen sage of he firm s life cycle (Perry and Grinaker, 994). Hypohesis predics ha cash holdings is posiing associaed wih R&D expendiures. We es his predicion by examining if he coefficien on cash holdings is greaer han zero. In his paper, we examine wheher selec ownership srucure (i.e. foreign ownership and insiuional 29

6 ownership) moderae he cash holdings-r&d expendiures relaionship. To es hypohesis 2-, we esimae he following equaion (2). RD CASH 5 0 SALE SIZE 6 FOR 2 7 LEV CASH 3 8 ROA FOR 9 TANGI MB 4 (2) where: FOR : Foreign ownership FOR is measured as he percenage of equiy ownership held by boh foreign firms and foreign financial insiuions. If moderaor ineracs wih he independen, he regression coefficien β 3 of he ineracive variable, CASH-FOR in he above equaion will prove significan. To es hypohesis 2-2, we esimae he following equaion (3). RD CASH 5 0 SALE SIZE 6 INSTI 2 7 LEV CASH 3 ROA 8 INSTI 9 TANGI MB 4 (3) where: INSTI : Insiuional ownership INSTI is measured as he percenage of equiy ownership held by domesic insiuional invesor. If he regression coefficien β 3 of he ineracive variable CASH-INSTI is saisically significan, insiuional invesor moderaes beween cash holdings and R&D expendiures. Our iniial sample includes all Korean firms ha lised on he Korea Sock Exchange (KSE) beween 2005 and 200. The selecion crieria of sample are as following. ) Firms ha belong in non financial indusry 2) Fiscal year is December 3 3) Firms wih financial daa in he KIS-VALUE daabase These selecion crieria give us a sample of 3,893 firm-year observaions. Firms wih missing daa for one or more years during he sudy period were excluded resuling in,675 firm-year observaion wih all informaion was colleced. Table presens he sample selecion process. 30

7 Table. Sample selecion process Toal observaion December 3 fiscal year Less han 0.% R&D inensiy ,893 (79) (78) (96) (22) (222) (205) (,92) Missing value (6) (50) (28) (03) (86) (9) (79) Oulier (39) (47) (57) (55) (53) (56) (307) Toal observaion , Resuls 4.. Descripive Saisics and Correlaions Table 2 provides descripive saisics for he variables included in our sudy. As presened in his able, he mean (median) value for Cash holdings (CASH) is (0.036), and he minimum are bu his doesn mean real zero. Foreign ownership (FOR) and insiuional ownership (INSTI) in he descripive saisics are showing a similar level. Table 3 presens correlaions among our main variables. R&D expendiures (RD) and Cash holdings (CASH) are posiively and significanly relaed (correlaion of 0.09). This is evidence ha firms wih relaively larger cash holdings also inves R&D. This is consisen wih prior research. And foreign ownership (FOR) is correlaed wih R&D expendiures, bu insiuional ownership (INSTI) is no. Also, he correlaion beween leverage raio (LEV) and fuure invesmen opporuniy (MB) measures is Some of he correlaion beween various independen and conrol variables are significan, suggesing mulicollineariy may be an issue. We esimaed he variance inflaion facors (VIF) saisics-none of which exceeded 2, which is well below 0, he level a which mulicollineariy may be a problem. So, our analyses are unlikely o have a serious problem wih mulicollineariy. 3

8 Table 2. Descripive saisics Mean Median Min. Max. Sd. RD CASH FOR INSTI MB SALES SIZE LEV ROA TANGI Noes: RD: R&D inensiy (R&D expendiure/sales); CASH: Cash holdings (quick asses (cash and markeable securiies)/oal asses); FOR: Foreign ownership; INSTI: Insiuional ownership; MB: Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES: Growh rae of sales ((sales -sales -)/sales -); SIZE: Firm size (ln(oal asses)); LEV: Leverage raio (oal deb/oal asses); ROA: Reurn on asses(repored earnings/oal asses); TANGI: Tangible asses invesmens((angible asses - angible asses - + depreciaion cos)/oal asses) RD.000 Table 3. Correlaion marix RD CASH FOR INSTI MB SALES SIZE LEV ROA TANGI CASH *** FOR *** *** INSTI MB *** ** SALES * ** *** SIZE ** *** *** *** *** LEV * *** *** *** *** *** *** ROA *** *** *** *** *** *** *** TANGI ** ** *** *** *** *p < 0., **p < 0.05, ***p < 0.0 Noes: RD: R&D inensiy (R&D expendiure/sales); CASH: Cash holdings (quick asses (cash and markeable securiies)/oal asses); FOR: Foreign ownership; INSTI: Insiuional ownership; MB: Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES: Growh rae of sales ((sales -sales -)/sales -);SIZE: Firm size (ln(oal asses)); LEV: Leverage raio (oal deb/oal asses) 32

9 4.2. Muliple Regression Resuls Table 4 provides he empirical analysis of Hypohesis. We find evidence ha cash holdings is posiively associaed wih R&D expendiures. The esimaed coefficien on cash holdings (CASH) is posiive and saisically significan. This finding provides consisen suppor for Hypohesis. This is consisen wih prior research. The esimaed coefficien on fuure invesmen opporuniy (MB) is posiive and saisically significan. This means ha firms increase R&D invesmens when opporuniy of fuure invesmens occurs. On he oher hand, he pas growh variable, sales growh rae (SALES) is negaively relaed wih R&D expendiures, agains expecaion. Lee and Kim (2000) insis ha R&D expendiures effec on he reurn on asses and growh of angible asses bu don effec on he growh rae of sales. We hink ha he firms increase R&D expendiures o cover he low growh rae of curren sales. The firm size (SIZE) is marginally significan. The esimaed coefficiens sign for leverage raio (LEV) is negaive. Tangible asses invesmens (TANGI) are posiive bu no saisically significan. Table 4. Regression analysis on he cash holdings-r&d expendiures relaionship RD CASH MB SALES SIZE LEV 0 2 6ROAi, 7TANGI Variables Pred. sign Coefficiens Saisics Inercep CASH *** 4.2 MB *** SALES ** SIZE *.722 LEV *** ROA TANGI Adj. R F value *** N. of Obs.,675 *p < 0., **P < 0.05, ***p < 0.0 Noes: RD: R&D inensiy (R&D expendiure/sales); CASH: Cash holdings (quick asses (cash and markeable securiies)/oal asses); MB: Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES: Growh rae of sales ((sales -sales -)/sales -); SIZE: Firm size (ln(oal asses)); LEV: Leverage raio (oal deb/oal asses); ROA: Reurn on asses(repored earnings/oal asses); TANGI: Tangible asses invesmens((angible asses -angible asses - +depreciaion cos )/oal asses )

10 Table 5 repors he resul of Hypohesis 2-. In he hierarchical regression analysis, we enered our moderaor variable ha is foreign ownership (FOR), in successive models. From Table 5, in erms of he ineracions beween he proxies for cash holdings (CASH) and foreign ownership (FOR), he esimae coefficiens are insignifican. Our resuls sugges ha foreign ownership doesn moderae he relaionship beween cash holdings and R&D expendiures. We did no suppor for hypohesis 2-. Therefore, foreign ownership (FOR) is no a moderaor. Oher conrol variable is he same wih resul of Table 4. Table 5. Hierarchical regression analysis for examinaion of he effec of foreign ownership on cash holdings and R&D expendiures RD CASH FOR CASH FOR MB SALE 5 0 SIZE 6 2 LEV 7 3 ROA 8 TANGI 9 4 Variables Pred. sign Sep Sep 2 Sep 3 Inercep * CASH *** *** *** FOR CASH*FOR MB *** 0.74 *** 0.74 *** SALES ** ** ** SIZE * LEV *** *** *** ROA TANGI Adj. R N. of Obs.,675,675,675 F value 8.644*** 7.75*** 6.87*** *p < 0., **P < 0.05, ***p < 0.0 Noes: RD : R&D inensiy (R&D expendiure/sales); CASH : Cash holdings (quick asses (cash and markeable securiies)/oal asses); FOR : Foreign ownership; MB : Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES : Growh rae of sales ((sales -sales -)/sales -); SIZE : Firm size (ln(oal asses)); LEV : Leverage raio (oal deb/oal asses); ROA : Reurn on asses(repored earnings/oal asses) ; TANGI : Tangible asses invesmens((angible asses -angible asses -+depreciaion cos )/oal asses ) 34

11 Table 6 shows he resul of Hypohesis 2-2. Hypohesis 2-2 predics ha insiuional ownership miigae he relaionship beween cash holdings and R&D expendiures. In he Sep 2 of Table 6, he coefficien of insiuional ownership (INSTI) is saisically insignifican and he ineracion beween cash holdings (CASH) and insiuional ownership (INSTI) is saisically significan (wih he esimae coefficien equals 0.099). Therefore, insiuional ownership (INSTI) is a pure moderaor. Our resuls sugges ha insiuional ownership srenghen he relaionship beween cash holdings and R&D expendiures. So, we can say ha hey are less likely o evaluae corporae execuives on he basis of shor-erm earnings alone and are more likely o suppor value-creaing. Table 6. Hierarchical regression analysis for examinaion of he effec of insiuional ownership on cash holdings and R&D expendiures RD CASH INSTI CASH INSTI MB SALE 5 0 SIZE 6 2 LEV 7 3 ROA 8 TANGI 9 4 Variables Pred. sign Sep Sep 2 Sep 3 Inercep CASH *** 0.0 *** *** INSTI +/ * CASH*INSTI *** MB *** 0.77 *** 0.72 *** SALES ** ** ** SIZE * LEV *** *** -0.6 *** ROA TANGI Adj. R N. of Obs.,675,675,675 F value 8.644*** *** 7.79 *** *p < 0., **P < 0.05, ***p < 0.0 Noes: RD: R&D inensiy (R&D expendiure/sales); CASH: Cash holdings (quick asses (cash and markeable securiies)/oal asses); INSTI: Insiuional ownership; MB: Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES: Growh rae of sales ((sales -sales -)/sales -); SIZE: Firm size (ln(oal asses)); LEV: Leverage raio (oal deb/oal asses); ROA: Reurn on asses(repored earnings/oal asses) ; TANGI: Tangible asses invesmens((angible asses -angible asses - +depreciaion cos )/oal asses ) 35

12 4.3. The Addiional Analysis There is a lo of he ownership in corporae apar from ouside ownership such as foreign ownership and insiuional ownership. So, we es he moderaing effecs various ownership beween cash holdings and R&D expendiures. A lo of Korean firms are classified as a large business group (or family group). The large business group is ha he same person conrolled, in effec, business conens of more han wo corporae. These firms of large business group are able o gain access o inside informaion and share resources wihin he business group (Chang, 2003; Chang e al. 2006). Also, he firms of large business group, which are bound ogeher by formal and informal ies, end o share resources and coordinae business aciviies (Granoveer, 994; Khanna and Rivkin, 200). So business groups serve as inernal capial markes (Leff, 978; Khanna and Palepu, 997). In he inernal capial marke, he firms of large business group can use resources of financial facor under he conrol of oher group members as well as is own financial resources. By sharing and ransferring resources of financial, firms of large business group can inves more han wha hey can afford (Hoshi e al. 99). Especially, he Korean firms of large business group are sensiive o he cash flows of oher group members, raher han o is own cash flow (Shin and Park, 999). In ransferring financial resources among he large business group firms, hose wih excess cash flows are likely o be providers and hose wih excess cash flows are likely o be providers and hose facing liquidiy consrains are likely o be recipiens (Scharfsein and Sein, 2000). Therefore, for firms wih high levels of financial slack, business group ownership encourages he focal firm o save higher porions of financial slack for oher members. The focal firm is less capable of convering financial slack ino R&D expendiures. In he hierarchical regression analysis presened Table 7. We enered our moderaor variable ha is large business group (GROUP) in successive models. In erms of he ineracions beween he proxies for cash holdings (CASH) and large business group (GORUP), he esimae coefficiens are insignifican. We do no find evidence ha large business group (GROUP) moderaes he srengh of he cash holdings-r&d expendiures relaionship. Bu oher conrol variable is he same wih resul of Table 4. According o he early work of agency heory, Jensen and Meckling (976) argued ha here are he ineres conflics beween owners and managers. Managers in agency heory are likely o seek privae ineres in conras o owners ineres. As insider ownership increases, agency coss may be reduced since managers bear a larger share of hese coss. This is Type I conflics. By conras, Type II conflics are more severe in such firms: he majoriy shareholder may use is conrolling posiion in he firm o exrac privae benefis a he expense of minoriy shareholders. Which of hese conroversial roles of conrolling shareholders is more derimenal o firm value is an empirical quesion ha few sudies have aemped o 36

13 answer (Claessens e al. 2002; Lins, 2003; Cronqvis and Nilsson, 2003). As Demsez (983) and Fama and Jensen (983) insis ha managers holding a subsanial porion of a firm s equiy may have enough voing power o ensure ha heir posiion inside he company is secure. As a resul, hey may become o a grea exen insulaed from exernal disciplining forces such as he akeover hrea or he managerial labor marke (Farinha, 2003). So managers are likely o use financial slack for heir ineres and hey did no ransfer financial slack o he R&D expendiures. This resuls show ha Table 8. We don find moderaing effec of he share of manager. Therefore, for subgroup analysis, observaions of he faciliaor were divided ino wo groups wih a median value being employed as a dividing poin. In each group, Spearman correlaion analysis was performed. The correlaions beween cash holdings and R&D expendiures are represened in Table 9. Table 7. Hierarchical regression analysis for examinaion of he effec of large business group on cash holdings and R&D expendiures RD CASH GROUP CASH GROUP MB SALE 5 0 SIZE 6 2 LEV 7 3 ROA 8 TANGI 9 Variables Pred. sign Sep Sep 2 Sep 3 Inercep CASH *** *** *** GROUP? ** ** CASH*GROUP MB *** 0.86 *** 0.86 *** SALES ** ** ** SIZE * *** *** LEV *** *** *** ROA TANGI Adj. R N. of Obs.,675,675,675 F value *** *** *** *p < 0., **P < 0.05, ***p < 0.0 Noes: RD: R&D inensiy (R&D expendiure/sales); CASH: Cash holdings (quick asses (cash and markeable securiies)/oal asses); GROUP : if a firm belongs o large business group (o.w. zero); MB: Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES: Growh rae of sales ((sales -sales -)/sales -); SIZE: Firm size (ln(oal asses)); LEV: Leverage raio (oal deb/oal asses); ROA: Reurn on asses(repored earnings/oal asses) ; TANGI: Tangible asses invesmens((angible asses -angible asses -+depreciaion cos )/oal asses ) 4 37

14 Table 8. Hierarchical regression analysis for examinaion of he effec of he share of manager on cash holdings and R&D expendiures RD CASH MANAGE CASH MANAGE MB SALE 5 0 SIZE 6 2 LEV 7 ROA 8 3 TANGI 9 Variables Pred. sign Sep Sep 2 Sep 3 Inercep CASH *** 0.0 *** *** MANAGE CASH*MANAGE MB *** 0.79 *** 0.78 *** SALES ** ** ** SIZE * ** ** LEV *** *** *** ROA TANGI Adj. R N. of Obs.,675,675,675 F value *** *** *** *p < 0., **P < 0.05, ***p < 0.0 Noes: RD: R&D inensiy (R&D expendiure/sales); CASH: Cash holdings (quick asses (cash and markeable securiies)/oal asses); MANAGE: The share of manager; MB: Fuure invesmen opporuniies ((oal liabiliy + marke capial)/oal asses); SALES: Growh rae of sales ((sales -sales - )/sales -); SIZE: Firm size (ln(oal asses)); LEV: Leverage raio (oal deb/oal asses); ROA: Reurn on asses(repored earnings/oal asses) ; TANGI: Tangible asses invesmens((angible asses - angible asses -+depreciaion cos )/oal asses ) Table 9. Subgroup analysis abou he share of manager High MANAGE RD Low MANAGE Fisher s Z CASH 0. *** 0.03 *** *p < 0., **P < 0.05, ***p < 0.0 Noes: RD : R&D inensiy (R&D expendiure/sales); CASH : Cash holdings (quick asses (cash and markeable securiies)/oal asses); MANAGE : The share of manager In Table 9, correlaion coefficiens were compared beween groups. Wheher he difference in correlaion coefficiens beween groups is significan or no canno be decided by simple comparison. Fisher s Z saisics can be used o deermine he significance of he difference in correlaion coefficiens beween groups. The value of sandard Z of in erms 4 38

15 of insiuional ownership (INSTI) was Therefore, he share of managers doesn have moderaing effec beween R&D expendiures and cash holdings. 5. Conclusion Prior sudies have examined ha how he inernal and exernal funds and liquidiy of company affec R&D expendiures and how he ownership mechanisms affec decision makings abou invesmen. However, researchers argue wheher he ownership srucures indirecly affec he R&D expendiures-he resource of inernal funds relaionship. In his paper, we examine how he cash holdings have an impac on R&D expendiures and wheher he ownership mechanisms moderae he R&D expendiures-he resource of inernal funds relaionship. We drew our sample firms ha were lised on he Korea Sock Exchange (KSE) and colleced daa for he years 2005 o 200. We used he KIS-VALUE daabase o gaher financial daa. Firms wih missing for one or more years during he sudy period were excluded, resuling in,675 firms (year) for which all informaion was colleced. The resul showed ha cash holdings have a posiively relaionship wih R&D expendiures. Specially, we found ha insiuional ownership had a posiive moderaing effec of he R&D expendiures-he resource of inernal funds relaionship. In addiional analysis, he large business group and he share of managers doesn moderae he relaionship beween cash holdings and R&D expendiures. These resuls provide ha insiuional invesor in Korea end o be long-erm oriened, acive and sophisicaed invesor. They are less likely o evaluae corporae execuives on he basis of shor-erm earnings alone and are more likely o suppor value-creaing. We have aemped o empirically demonsrae he moderaing effec of he relaionship beween cash holdings and R&D expendiures. Prior sudies have no disinguished he moderaing effec. Mos sudies have examined only he relaionship beween cash holdings and R&D expendiures. Limiaions of our sudy include our sample consiss of firms lised on he Korea Sock Exchange. Therefore, more research is needed o confirm his inerpreaion of our resuls. Also, we consider inernal cash as a firm resource for R&D expendiures. The level of cash does no offer a complee financing channel of he financial slack of firms. Fuure research is needed o conrol he oher financing aciviies, such as equiy financing or deb financing saus. References Baysinger, B.D., Kosnik, R.D., and Turk, T.A., 99. Effecs of board and ownership srucure on corporae R&D sraegy. Academy of Managemen Journal, 34 (), pp

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