Market Concentration, Corporate Governance and Innovation: Partial and Combined Effects in US-Listed Firms

Hashem, Nawar and Ugur, Mehmet (2012): Market Concentration, Corporate Governance and Innovation: Partial and Combined Effects in US-Listed Firms. Published in: Journal of Governance and Regulation , Vol. Volume, No. Issue 3 (2012): pp. 199-215.

Abstract

Existing research on the relationship between market concentration and innovation has produced conflicting findings. In addition, the emerging literature on the relationship between corporate governance and innovation tends to focus only on partial effects of corporate governance on innovation. We aim to contribute to the debate by investigating both partial and combined effects of corporate governance and market concentration on innovation. Utilising a dataset for 1,400 non-financial US-listed companies and two-way cluster-robust estimation methodology, we report several findings. First, the relationship between market concentration and innovation is non-linear. Secondly, the relationship has a U-shape in the case of input measure of innovation (research and development - R&D – expenditures); but it has an inverted-U shape when net book-value of brands and patents is used as output measure of innovation. Third, corporate governance indicators such as anti-takeover defences and insider control tend to have a negative partial effect on R&D expenditures but a positive partial effect on net book-value of brands and patents. Finally, when interacted with market concentration, anti-takeover defences and insider control act as complements to market concentration. Hence, firms with strong anti-take-over defences and under insider control tend to spend more on R&D but are less able to generate valuable brands and patents as market concentration increases. These results are based on two-way cluster-robust estimation, which takes account of both serial and cross-sectional dependence in the error terms.

• Item Type: MPRA Paper
• Language: English
• Keywords: Innovation, competition, corporate governance, two-way cluster-robust estimation
• Subjects: D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; G - Financial Economics > G3 - Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O31 - Innovation and Invention: Processes and Incentives; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance

References

Aghion, Philippe, Mathias Dewatripont, and Patrick Rey (1999), ‘Competition, financial discipline and growth’, The Review of Economic Studies 66, 825-852.

Aghion, Philippe, Wendy Carlin and Mark Schaffer (2002), ‘Competition, innovation and growth in transition: Exploring the interactions between policies’, William Davidson Working Paper Number 501 (March).

Aghion, Philippe, Nick Bloom, Richard Blundell, Rachel Griffith and Peter Howitt (2005), ‘Competition and innovation: An inverted-U relationship”, The Quarterly Journal of Economics, 120(2): 701-728.

Arrow, Kenneth J. 1962. ‘Economic Welfare and the Allocation of Resources to Invention."

Atanassov, Julian (2012), ‘Do hostile takeovers stifle innovation? Evidence from antitakeover legislation and corporate patenting, Journal of Finance, (forthcoming).

Battaggion, M.R. and Tajoli L. (2001), ‘Ownership structure, innovation process and competitive performance: the case of Italy”, CESPRI Working Paper No. 120, Milano.

Baysinger, B.D., Kosnik, R.D. and Turk T.A. (1991), ‘Effects of Board and Ownership Structure on Corporate R&D Strategy”, Academy of Management Journal, 34(1):205-214.

Belloc, Filippo (2012), ‘Corporate governance and innovation: A survey’, Journal of Economic Surveys (forthcoming), available at SSRN: http://ssrn.com/abstract=1583831

Berubé C, Duhamel M, ErshovD (2012), ‘Market incentives for business innovation: results from Canada’, Journal of Industry, Competition and Trade, 12(1), pp. 47-65.

Cameron, A. C., Gelbach, J. B., Miller, D. L., 2006a. Bootstrap-based improvements for inference with clustered errors, University of California, Davis working paper # 06-21.

Cameron, A. C., Gelbach, J. B., Miller, D. L., 2006b. Robust inference with multi-way clustering, working paper.

Fama, E. F., MacBeth, J. D., 1973. Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy 81 (3), 607–636.

Gilbert, Richard 2006. Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate? In Adam B. Jaffe, Josh Lerner and Scott Stern (eds), Innovation Policy and the Economy – Volume 6, Cambridge, Mass.: MIT Press, pp. 159-215.

Gilbert, Richard, and David Newbery. 1982. "Preemptive Patenting and the Persistence of Monopoly." American Economic Review 72(2): 514-526.

Gow, Ian D., Gaizka Ormazabal and Daniel Taylor. 2010. Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research, The Accounting Review 85 (2): 483-512.

Graves, S.B. (1988) “Institutional Ownership and Corporate R&D in the Computer Industry”, Academy of Management Journal, 31:417-428.

Grosfeld, Irena and Tressel, Thierry. 2002. Competition and Ownership Structure: Substitutes or Complements? Evidence from the Warsaw Stock Exchange. The Economics of Transition, 10(3): 525-551.

Hart, O .1983. ‘The Market Mechanism as an Incentive Scheme’, Bell Journal of Economics, 14(Autumn): 366-382.

Hicks, J. R. (1935), “Annual Survey of Economic Theory: The Theory of Monopoly,” Econometrica, Vol. 3, No. 1., pp. 1-20.

Hill, C.W. and Snell, S.A. (1988) ‘External control, corporate strategy, and firm performance in research-intensive industries’, Strategic Management Journal, 9(6), 577-590.

Hill, C.W., Hitt, M.A. and Hoskisson, R.E. (1988) “Declining US Competitiveness: reflections on a Crisis”, Academy of Management Executive, 2(1):51-60.

Jensen, Michael, 1988, “Takeovers: Causes and consequences,”Journal of Economic Perspectives 2, 21-48

Kamien MI, Schwartz NL (1976) On the degree of rivalry for maximum innovative activity. Quarterly Journal of Economics 90:245–260

Maher, M. and Andersson, T. (2002) “Corporate Governance: Effects on Firm Performance and Economic Growth”, in J. McCahery, L. Renneboog, P. Moerland and T. Raaijmakers (eds.) Corporate Governance Regimes: Convergence and Diversity, Oxford University Press, Oxford.

Newey, W. K., West, K. D., 1987. A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55 (3), 703–708.

Peneder, Michael (2012), ‘Competition and innovation: Revisiting the inverted-U relationship’, Journal of Industry, Competition and Trade, 12(1), pp. 1-5

Peroni C, Gomes Ferreira IS (2012), ‘ Competition and innovation in Luxembourg’, Journal of Industry, Competition and Trade, 12(1), pp. 93-117.

Petersen, Mitchell A. 2007. Estimating standard errors in finance panel data sets: Comparing approaches.Review of Financial Studies, 22(1): 435-480.

Polder M, Veldhuizen E (2012) Innovation and competition in the Netherlands: testing the inverted U for industries and firms, Journal of Industry, Competition and Trade, 12(1), pp. 67-91.

Reinganum, Jennifer F. 1983. "Uncertain Innovation and the Persistence of Monopoly." American Economic Review 73: 741-748.

Reinganum, Jennifer F. 1985. "Innovation and Industry Evolution." Quarterly Journal of Economics 100: 81-99.

Sapra, Haresh, Ajay Subramanian and Krishnamurthy Subramanian (2009), ‘Corporate governance and innovation: Theory and evidence’, Discussion paper published in Corporate Governance and Capital Markets Ideas’, edited by the Chicago Booth School of Business. http://faculty.chicagobooth.edu/haresh.sapra/docs_WP/GI_01Oct09_SSRN.pdf

Schumpeter, Joseph A. 1934. The Theory of Economic Development. Cambridge, MA: Harvard University Press. (New York: Oxford University Press, 1961.) First published in German, 1912.

Schumpeter, Joseph A. 1942. Capitalism, Socialism, and Democracy. New York: Harper and Brothers. (Harper Colophon edition, 1976.)

Shleifer, Andrei and Lawrence H. Summers, 1988, Breach of trust in hostile takeovers, in A. J. Auerbach ed., Corporate Takeovers: Causes and consequences, Chicago: University of Chicago Press, 33-56.

Stein, Jeremy C., 1988, “Takeover Threats and Managerial Myopia,” The Journal of Political Economy, 96(1), 61-80

Thompson, S., 2006. Simple formulas for standard errors that cluster by both firm and time, Working paper, Harvard University.

Wooldridge, J. M., 2003. Cluster-sample methods in applied econometrics. American Economic Review 93 (2), 133–138.