R&D investments in family and founder firms: An agency perspective

Journal of Business Venturing 27 (2012) 248–265

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Journal of Business Venturing

R&D investments in family and founder firms: An agency perspective Joern H. Block ⁎ Technische Universität München, Schöller Chair in Technology and Innovation Management, Arcisstr. 21, D-80333 Munich, Germany Erasmus University Rotterdam, Erasmus School of Economics, Department of Applied Economics, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands Erasmus Research Institute of Management (ERIM)

a r t i c l e

i n f o

Article history: Received 17 June 2009 Received in revised form 23 September 2010 Accepted 25 September 2010 Available online 28 October 2010 Field Editor: S. Venkataraman Keywords: Lone founder firms Family firms R&D spending R&D productivity Entrepreneurial orientation Agency theory Monitoring

a b s t r a c t Investments in R&D can influence a firm's ability to develop new products and to create and adopt innovative technologies that may enhance productivity. However, due to uncertainty regarding the outcome, investments in R&D may lead to an agency problem between the owners and the managers of a firm. Family and founder firms are often considered to be different in their agency situation than other firms, which may have an influence on R&D investments. This paper analyzes R&D spending in family and founder firms versus other firms. The results show that while family ownership decreases the level of R&D intensity, ownership by lone founders has a positive effect not only on R&D intensity but also on the level of R&D productivity. The paper contributes to the understanding of the role of entrepreneurship in making high risk/high return R&D decisions. © 2010 Elsevier Inc. All rights reserved.

1. Executive summary Investments in R&D, particularly in research-intensive industries, are necessary for innovation. These investments increase the firm's learning or absorptive capacity, that is, its ability to make use of existing information. However, they are different from other investments in that they take time to pay off and often fail to achieve their goals. An agency problem may occur, for example, if the manager of a firm has better information about the nature of the R&D investments and their likelihood of success than external owners (a situation of asymmetric information). Moreover, the informed manager may fear the costs associated with R&D investments and therefore favor less risky, short-term investments over risky, long-term investments (a situation of moral hazard). According to the literature, this agency situation may be different in family and founder firms. Concentrated ownership, effective monitoring, and a thorough understanding of the firm's business model should reduce the agency costs associated with R&D spending and lead to higher levels of R&D intensity and R&D productivity. Family firms, however, may suffer from inner family conflicts that create new agency costs and imply a decrease of R&D spending in these firms relative to others. I address the open questions of (1) whether family firms exhibit high or low levels of R&D spending and R&D productivity and (2) how they, as a group, compare with lone founder or other firms. In this paper, I make distinctions between the ownership and management dimensions of family and founder firms and analyze their R&D intensity and R&D productivity versus that of other firms. Using panel data from large, public U.S. firms in researchintensive industries, it is found that family ownership is negatively associated with the level of R&D intensity, while lone founder

⁎ Technische Universität München, Schöller Chair in Technology and Innovation Management, Arcisstr. 21, D-80333 Munich, Germany. Tel.: +49 481 83729. E-mail addresses: [email protected], [email protected]. 0883-9026/$ – see front matter © 2010 Elsevier Inc. All rights reserved. doi:10.1016/j.jbusvent.2010.09.003

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ownership shows a positive relationship. In addition, it is found that lone founder ownership has a positive effect on R&D productivity. I find no evidence that the management dimension of family and lone founder firms has an effect on R&D spending and/or R&D productivity. The results remain true for various model specifications. The paper contributes to the discussion about the link between entrepreneurship and innovation. Entrepreneurs are seen as individuals who discover, evaluate, and exploit entrepreneurial opportunities, and thereby induce technological change and progress. This study extends this view. Entrepreneurship as a context matters also for controlling incentives in making high risk/high return R&D investments. Relative to other firm owners, entrepreneurs seem to have an advantage in monitoring the R&D process, characterized by numerous asymmetric information and moral hazard problems. Another contribution concerns the debate over whether family and founder firms have a stronger entrepreneurial orientation than other types of firms. R&D intensity correlates with three dimensions of entrepreneurial orientation, namely, being innovative, taking risks, and being proactive. It appears that firms lose some of their entrepreneurial orientation when they progress from a lone founder firm into a family firm. The paper also contributes to the discussion over whether family and founder firms are more long-term oriented than non-family firms. Using R&D intensity as a proxy for long-term orientation in research-intensive industries, it is found evidence that disputes the idea, popular in the literature and the media, that family firms have a more long-term perspective than do other firms. The paper's findings indicate that the reality is more complex than commonly assumed. Finally, by showing that family firms and lone founder firms may be two different types of firms, this paper contributes to the discussion of how best to characterize the qualities of a family firm. The paper's findings offer practical implications for family firms. Even though R&D spending is important to sustain a firm's competitive advantage, the paper's results suggest that over time, family firms tend to neglect investments in R&D. Family firms and the management teams of these firms should be aware of this tendency and take appropriate measures. For example, they may elect to limit the dividends paid out to owners in a ‘family constitution’, which would enable the management to consistently invest that money in projects that are important to the future of the firm. Another practical implication concerns the positive role of founders with regard to the monitoring of R&D processes. The paper's results suggest that it makes sense to involve founders in the monitoring of the firm's operations, even when they are no longer active in the management of the firm.

2. Introduction Investments in research and development (R&D) are essential to advance innovation. However, R&D spending has certain characteristics that make it different from other investments: it is time-consuming and often fails to meet objectives. R&D returns are uncertain and highly skewed (Scherer, 1998; Scherer and Harhoff, 2000). Making R&D investments therefore requires a risk-taking attitude and a long-term horizon. This explains why R&D investments may lead to an agency problem between owners and managers of a firm: the manager undertaking the R&D decisions often has better information about the likelihood of success and the nature of given R&D activity than does an external owner, and this creates an instance of asymmetric information (Akerlof, 1970; Leland and Pyle, 1977; Myers and Majluf, 1984; Thakor, 1990). In addition, because managers are usually primarily interested in short-term performance, they may fear the costs associated with R&D and favor projects with short-term payoffs over uncertain projects with long-term payoffs. This can lead to a moral hazard situation (Campbell and Marino, 1994; Hirshleifer and Thakor, 1992; Narayanan, 1985). As a result of asymmetric information and moral hazard, an underinvestment problem may occur with R&D. Specifically, the firm may invest less in R&D than it should to stay competitive. Yet, problems of moral hazard may also lead to overinvestment: managers may invest the firm's free cash flow in their “pet projects” rather than paying out the funds to shareholders (Jensen, 1986; Vogt, 1994). Either way, the investment strategy is not value maximizing from a firm's perspective. From an agency theory perspective, family- and lone founder-owned firms are different from other businesses (Chrisman et al., 2004, 2007). In particular, the owners are in a strong position to monitor the management of the firm. As owners, families and lone founders usually own large blocks of stock, which is why they have a strong incentive to ensure effective monitoring (Fama, 1980; Maug, 1998). Moreover, they often exhibit a thorough understanding of the business and its underlying processes, which reduces the information asymmetries between the owners and managers of the firm (Miller and Le Breton-Miller, 2005; Ward, 2004). In some cases, the managers of the firm are owner–managers or belong to the business-owning family. A stronger alignment of a firm's ownership and management suggests lower agency costs (Jensen and Meckling, 1976) and more efficient R&D spending. For family firms, however, this view has been challenged from several perspectives. It has been argued that family firms are characterized by conflicts originating from, e.g., sibling rivalries, identity conflicts and different goals of individual family members with regard to the development of the firm (Dyer, 1994; Eddleston and Kellermanns, 2007; Schulze et al., 2001, 2003). Another stream of literature argues that families as owners may primarily seek private control-oriented benefits and preferentially seek high dividends over firm growth (Chandler, 1990; Claessens et al., 2002; Johnson et al., 2000; Morck and Yeung, 2003). Their comprehensive understanding of the business and their entrenchment in the firm puts them in a strong position to pursue their private goals. These two lines of arguments cast doubt on families being strong monitors and suggest less efficient R&D spending in family firms relative to lone founder or other firms. In summary, it is an open question whether family firms exhibit high or low levels of R&D spending and R&D productivity and how they as a group compare against lone founder or other firms. Using a panel dataset of large U.S. firms, this paper analyzes the R&D intensity and R&D productivity in family and lone founder firms versus other firms. Using fixed- and random-effects panel data regressions, the paper shows that lone founder ownership has positive effects on both R&D intensity and R&D productivity, whereas family ownership seems to have neutral or even

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negative effects. Thus, family and lone founder firms seem to be two different types of firms regarding their ability to reduce agency costs of R&D spending. This paper contributes to the discussion about the link between entrepreneurship and innovation (e.g., Acs et al., 2009; Cliff et al., 2006; Koellinger, 2008). Entrepreneurs are seen as individuals who discover, evaluate, and exploit entrepreneurial opportunities (Shane, 2000; Shane and Venkataraman, 2000). This way, they act as innovators and introduce new products to markets or create new production methods, thereby inducing technological change and progress (Schumpeter, 1934). The study shows that founders being firm owners reduce R&D-related agency costs. Relative to other firm owners, founders have an advantage in monitoring the R&D process, this way reducing problems of asymmetric information (Akerlof, 1970; Leland and Pyle, 1977; Myers and Majluf, 1984; Thakor, 1990) and moral hazard (Campbell and Marino, 1994; Hirshleifer and Thakor, 1992; Narayanan, 1985). Entrepreneurs thus play an important role in the innovation process not only as actors transforming new knowledge into innovation (Acs et al., 2009) but also as monitors of the innovation process. In summary, entrepreneurship as a context matters for controlling incentives in making high risk/high return R&D investments. The remainder of the paper is organized as follows. The next section presents the underlying theory and concepts. Section 4 develops hypotheses regarding the effects of lone founder and family firms with regard to R&D intensity and R&D productivity. Section 5 describes the sample and the measures used in our empirical study. Section 6 presents the regression results, with Section 7 continuing with a related discussion. Section 8 outlines the practical implications of the findings. Section 9 concludes and offers ideas for further research. 3. Theory and concepts 3.1. R&D as investment Investments in R&D are more difficult to finance than other types of investments (Arrow, 1962; Nelson, 1959). Hall (2002) provides a comprehensive overview of the literature regarding this issue. There are two arguments for why R&D investments are difficult to finance. The first argument concerns R&D output, namely knowledge. Knowledge is a non-rival good (Arrow, 1962). Once it is made publicly available, its use by one actor does not preclude its use by other actors and knowledge spillovers may occur (Audretsch and Feldman, 1996). The social rate of return to R&D is higher than the private rate of return (Griliches, 1992). These positive externalities can, however, lead to an underinvestment problem. To the extent that the knowledge created by R&D investments cannot be kept secret, the firm undertaking these investments will have problems appropriating the returns of its R&D activities. For example, consider a firm that produces new knowledge. The firm is granted a patent and introduces a new product into the market. The information included in the patent (and the product itself) becomes accessible to rival firms, which can then use this information to improve their products. Moreover, the rival firm may decide to “invent around” its competitor's patent and introduce a similar product in the marketplace (Harabi, 1995). As a result, the firm undertaking the initial R&D investment may not receive the full return on its investment; therefore, it might be optimal for the firm to cut down its R&D investments. The second argument refers to the relationship between the internal and the external costs of capital in the case of R&D investments. There may be a wedge between the required rate of return from an internal perspective and the required rate of return from an investor's perspective. Leaving tax considerations aside, two key reasons explain this wedge. First, there is an asymmetric information problem associated with R&D (Akerlof, 1970; Myers and Majluf, 1984; Thakor, 1990). The individuals who make R&D decisions often have better information about the prospects of success and the nature of the R&D activity than do their external investors. External investors may have difficulty in distinguishing good projects from bad projects and will charge a premium in order to compensate for this higher level of uncertainty (Leland and Pyle, 1977). Second, there is a danger of moral hazard on the part of those individuals who undertake R&D decisions—usually firm managers and executives. The problem arises if the ownership and management of a firm are separated and the two groups exhibit different levels of risk tolerance. Spending on R&D is unlikely to pay off in the immediate future and its returns are uncertain and highly skewed (Scherer, 1998; Scherer and Harhoff, 2000). Problems may arise if the managers making the R&D investment decisions are more risk averse than the owners of the firm. In such a case, managers may decide against R&D projects that markedly increase the risk profile of the firm's activities but that may still fall within the risk boundaries set by the firm's owners. Managers fear the costs associated with R&D and favor projects with short-term payoffs over uncertain projects with long-term payoffs. The reason is that they want to produce strong short-term results to retain their jobs and to maintain a good reputation in the external job market for executives (Campbell and Marino, 1994; Hirshleifer and Thakor, 1992; Narayanan, 1985), which may result in underinvestment in R&D. Yet, moral hazard may also lead to overinvestment. Jensen's (1986) free cash flow hypothesis suggests that managers may increase their wealth by investing the firm's free cash flow in unprofitable investment opportunities rather than paying out the funds to shareholders through dividends (Vogt, 1994). In sum, moral hazard problems may result in either over- or underinvestment. In any case, the investment strategies are not value maximizing from an owner's point of view. This study focuses on the wedge between internal and external costs of capital of R&D investments in family or lone founder firms as compared with other firms. The argument suggests that family or lone founder firms differ from other types of firms in terms of their ownership and management characteristics and that these differences influence the asymmetric information and moral hazard problems associated with R&D investments.

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3.2. R&D intensity versus R&D productivity As the discussion in the previous section shows, it makes sense to differentiate between R&D intensity and R&D productivity as two different variables of interest. R&D intensity is an input measure and refers to the level of R&D spending in relation to firm size or revenues (Brown and Svenson, 1998; Hagedoorn and Cloodt, 2003); R&D productivity, in turn, refers to the relationship between R&D inputs and R&D outputs or the relationship between R&D inputs and R&D outcomes. Widely used R&D output variables are the number of patents and patent citations (Trajtenberg, 1990) or the number of new products and new processes (Brown and Svenson, 1998; Hagedoorn and Cloodt, 2003). The measurement of R&D outcomes goes one step further: the goal is to analyze how R&D outputs translate into benefits for the firm such as cost reductions or sales improvements (Brown and Svenson, 1998; Mairesse and Hall, 1996; Mairesse and Sassenou, 1991). 3.3. Family firms versus lone founder firms The distinction between lone founder firms and family firms is relatively new to the literature; it was introduced by Miller et al. (2007) and was used to explain differences with regard to financial performance. Miller et al. (2007) define lone founder firms as firms in which one of the firm's founders is active as an executive or major shareholder and no relatives of the founder are involved in the business as top executives or large shareholders. Family firms, in contrast, are defined as firms in which at least two members of the founding family are involved as either major owners or executives. 3.4. Agency costs in family and lone founder firms Both the asymmetric information problem and the moral hazard problem of R&D spending are consistent with an agency theory view of the firm (Jensen and Meckling, 1976). Agency theory seeks to explain the relationship between the management and the owners of a firm (Fama, 1980; Jensen and Meckling, 1976; for a review, see Eisenhardt, 1989). Although not without criticism (Lubatkin, 2007; Lubatkin et al., 2007), agency theory is a widely used lens to describe differences between family and lone founder firms versus other types of firms (Chrisman et al., 2004, 2007). There exist several types of agency costs in family and lone founder firms. The literature distinguishes between (1) agency costs from the separation of ownership and management, (2) agency costs from conflicts between owners and lenders, (3) agency costs from conflicts between dominant and minority shareholders and, more recently, (4) agency costs from altruism. The classic example of agency costs concerns the case when ownership and management of a firm are separated (Berle and Means, 1932; Fama and Jensen, 1983; Jensen and Meckling, 1976). In such a situation, managers may have an incentive to pursue activities that increase their own utility but have a negative impact on firm value because they are not full owners of the firm, and therefore bear only part of the costs of their value-destroying activities. Ultimately, it is the shareholders who bear the costs. Agency costs may also arise due to a conflict of interest between dominant and minority shareholders (e.g., Claessens et al., 2000, 2002; Gomez-Mejia et al., 2001; Johnson et al., 2000; Morck and Yeung, 2003). Through pyramidal shareholder structures, tunneling, or self-dealing, dominant shareholders may expropriate minority shareholders. For example, a large shareholder may influence management to make favorable deals with other firms owned by this large shareholder. Conflicts between shareholders and lenders can lead to agency costs of debt (Anderson et al., 2003; Bester and Hellwig, 1987; Biais and Casamatta, 1999; Stiglitz and Weiss, 1981). By investing in risky projects and putting firm survival at stake, shareholders can transfer wealth from the lenders to themselves. The lenders do not share the gains if the project is a success (they get back the principal plus an interest), but they lose all or part of their loan if the project fails. Finally, a theory of agency and altruism in family firms has been proposed (Schulze et al., 2001, 2003). Actions undertaken by managers or owners to help other family members may lead to problems of self-control (Thaler and Shefrin, 1981). Those family members receiving help have an incentive to overstate their actual needs and thus divert resources away from the firm to the family resulting in loss of value to the firm. Following Chrisman et al. (2004), the four different types of agency costs noted above can be integrated into an additive model. The resulting inequality allows a direct comparison of the agency costs in family/lone founder firms (subscript Fam/Found) versus other firms (subscript Oth): OMFam=Found þ OLFam=Found þ DMFam=Found þ ALTFam=Found ≠OMOth þ OLOth þ DMOth þ ALTOth

ð1Þ

Where: OM = Agency costs from separation of Ownership and Management OL = Agency costs from conflicts between Owners and Lenders DM = Agency costs from conflicts between Dominant and Minority shareholders ALT = Agency costs from ALTruism Family or lone founder firms have higher agency costs if the sum on the left side of the inequality is greater than the sum on the right side of the inequality, and vice versa. Based on the agency theory, I develop hypotheses about the differences in the level and productivity of R&D investments between family- and lone founder-owned firms as compared to other types of firms. The

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arguments are based on agency benefits from a close alignment of ownership and management and the monitoring capabilities of families and lone founders as owners. 4. Hypotheses 4.1. Lone founder ownership and R&D investments As described above, moral hazard may exist on the part of the management team that undertakes R&D decisions. This problem may arise when the ownership and management of a firm are separate and when the two groups have different levels of risk tolerance. Managers are generally interested in job security, and they wish to promote their good reputation in the external job market for executives. Thus, they prefer to stay away from R&D projects with uncertain and long-term payoffs and will instead favor relatively safe projects with short-term payoffs (Campbell and Marino, 1994; Hirshleifer and Thakor, 1992; Narayanan, 1985). R&D investments lead to an increase in the firm's costs in the current period and may have a negative effect on short-term performance. The managers' jobs become less secure, and their bonus pay is likely to suffer. The situation becomes even worse in a situation of asymmetric information between management and ownership. I shall argue here that such R&D-related moral hazard and asymmetric information problems are mitigated in the case of lone founders as owners, because such individuals will have both the incentive and the power to monitor the firm's management effectively. Lone founders differ from other owners in many respects, and these differences may affect the agency problems associated with R&D spending. Lone founders, having been involved in the development of the business since founding, are intimately familiar with their businesses and have developed a thorough understanding of its underlying processes. In particular, they have a better understanding of the intensity and nature of R&D activity that will most directly benefit the firm. In addition, because their ownership percentages are typically high, and because they have invested substantially in the firm, they have strong incentives to conduct good monitoring. The free-rider problem associated with firms that are owned by dispersed shareholders does not exist in the case of lone founder-owned firms (Fama, 1980; Maug, 1998). As owners, lone founders may ask the firm's management for detailed information about particular R&D projects. These arguments suggest that lower information asymmetries exist between management and owners in lone founder-owned firms versus other firms. Lone founders are better able to distinguish good R&D projects from bad relative to other owners and they charge a lower premium than other owners in compensation for the uncertainty of R&D projects (Leland and Pyle, 1977). Based on the above arguments, the following two hypotheses are proposed: Hypothesis 1. Lone founder ownership will be positively associated with the level of R&D intensity. Hypothesis 2. Lone founder ownership will be positively associated with the level of R&D productivity. That is, ceteris paribus, the contribution of R&D to the firm's sales is higher in lone founder-owned firms versus other firms. 4.2. Family ownership and R&D investments Classic agency theory argues that family ownership mitigates agency problems in firms (Chrisman et al., 2004; Jensen and Meckling, 1976). As in the case of lone founders as owners, families as owners can be effective monitors, which would lead to a reduction in agency costs from the separation of ownership and management. Families as owners have a strong incentive for effective monitoring because they have a large percentage of their assets invested in the firm (Demsetz, 1988). There are also nonmonetary motives for effective monitoring. In many cases, the firm symbolizes the heritage and tradition of the family and is part of the family's identity. In addition, family owners often intend to pass the firm on to the next generation (Casson, 1999; Grassby, 2001; Guzzo and Abbott, 1990; James, 1999; Lansberg, 1999; Tagiuri and Davis, 1992) and, thus, want to leave the business in good condition. To summarize, the heritage and tradition of the firm and the intended transfer of the firm to the next family generation leads family owners to think long term and to be effective monitors. In addition, the current reputations of the family and the individual family members are strongly linked to the success of the firm (Deniz and Suarez, 2005; Dyer and Whetten, 2006; Uhlaner et al., 2004); this strong interrelationship between reputation and success tends to increase family owners' commitment to effective monitoring. Yet, a high willingness to be an effective monitor may not be enough: a good deal of knowledge about the business and a powerful position in the firm and its controlling institutions are also required. Similar to lone founders as owners, families as owners may have a profound understanding of the business. Often, they have grown up with the business and followed its development for many years. Previous research has also shown that family owners are often in a powerful position (Claessens et al., 2000, 2002; Gomez-Mejia et al., 2001; Morck and Yeung, 2003), which allows them to become effective monitors. As noted above, all these arguments suggest a reduction in agency costs from the separation of ownership and management, which should then lead to higher levels of R&D intensity and R&D productivity (Hall, 2002) in family-owned firms versus other firms. Yet, for several reasons, I expect the ability of families to do effective monitoring to be lower compared to lone founders as owners. Families as owners have a different set of goals and a different level of commitment to the firm than lone founders as owners have. Miller et al. (2010), for example, describe family owners as being focused on conservation rather than growth as a firm strategy. In many cases, family owners have inherited the firm and created only a relatively small part on their own. For this reason, it may be argued that the commitment for effective monitoring is lower with families as owners compared to lone founders as owners. A similar argument can be made for the knowledge that is required to do effective monitoring. Even though family owners have a profound

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understanding of the business through growing up with the firm, this understanding is most likely lower compared to lone founder owners who have founded the business on their own. Finally, I argue that families as owners may face a coordination problem with their monitoring efforts that lone founders as owners do not face (at least not to a similar extent). The literature describes family firms as “fertile fields for conflicts” (Harvey and Evans, 1994, p. 331). These conflicts may originate from sibling rivalry, identity conflict, children's desires to be different from their parents or different goals of individual family members with regard to the development of the firm (Dyer, 1994; Eddleston and Kellermanns, 2007; Schulze et al., 2001, 2003). In any case, such inner family conflicts may lead to additional coordination costs and make effective monitoring more difficult than would be the case with lone founders as owners. From a theory perspective, it is an open question whether these (negative) aspects of family ownership constrain the capability of families being strong monitors in such a strong way that they outweigh the positive aspects of family ownership mentioned above. Thus, I formulate the hypotheses against lone founder-owned firms and not against the group of other firms. The following two hypotheses are proposed: Hypothesis 3. Family-owned firms will have a lower level of R&D intensity than lone founder-owned firms. Hypothesis 4. Family-owned firms will have a lower level of R&D productivity than lone founder-owned firms. That is, ceteris paribus, the contribution of R&D to the firm's sales is lower in family-owned firms versus lone founder-owned firms. Table 1 summarizes the main arguments about the differences between family- and lone founder-owned firms regarding the effectiveness of monitoring the R&D process. 5. Data and variables 5.1. Sample In November 2003, Business Week (2003) ran a list of all the family firms in the S&P 500 as of July 31 of that year. This information led me to use Standard & Poor's 500 (S&P 500) as of July 31, 2003 as a starting point from which the sample is constructed. This resource is helpful because it provides qualitative information about the ownership structure and management composition of family firms. To obtain the sample, I excluded 346 firms that did not belong to R&D-intensive industries. Instead, I focused on the remaining 154 companies, all of which operate in Standard Industrial Classification (SIC) sectors such as chemical and allied products (SIC 28), industrial machinery and equipment (SIC 35), electronic and other electrical equipment (SIC 36), transportation equipment (SIC 37), instruments and related products (SIC 38), and business services (SIC 73).1 Next, I collected data about the companies' ownership structures and management composition from corporate proxy statements that had been submitted to the U.S. Securities and Exchange Commission (SEC) during the period 1994–2003. Proxy statements are considered the most reliable source of information about ownership structures (Dlugosz et al., 2006).2 The data are verified and expanded with information from Hoover's Handbook of American Business, Gale Business Resources, the Twentieth Century American Business Leaders Database at Harvard Business School, Forbes Lists of the 400 Richest Americans, Marquis's Who's Who in America, and information available on the companies' Web sites. Finally, information is collected from the Compustat North America and Compustat ExecuComp financial databases. The final sample included 1088 observations pertaining to 154 firms. The sample is comparable to other datasets that have been used in the field of family business research, including several studies that analyze the financial performance of family firms (Anderson and Reeb, 2003; Miller et al., 2007; Villalonga and Amit, 2006). 5.2. Distinction between lone founder firms, family firms, and other firms This study makes a distinction between three types of firms: (1) lone founder firms, (2) family firms, and (3) other firms. This distinction is relatively new in the family business literature. Most work to date has classified lone founder firms as family firms, which makes it impossible to separate effects of possible interest (Anderson and Reeb, 2003; Block, 2010; Dyer and Whetten, 2006; Short et al., 2009). The distinction between lone founder firms and family firms was introduced by Miller et al. (2007), who classify lone founder firms as firms in which the founders are involved as large owners (5% or more of the firm's equity) or board members (officer or director). Firms in which family members of the founder(s) are present as either large owners or members of the board are classified as family firms. I extend the classification of Miller et al. (2007) to the level of the ownership and management dimension of family and lone founder firms. Lone founder-owned firms are companies in which the founder has at least 5% of the firm's common equity but no family members of the founder owns 5% or more of the firm's stock.3 Lone foundermanaged firms are companies in which the founder serves as CEO or chairperson of the board of directors but no family member of the founder is involved as CEO or chairperson. Family-managed firms, by contrast, are defined as companies in which a member of the founding family serves as CEO or chairperson; family-owned firms are companies in which the founding family owns 5% or more of the firm's stock. In some cases, both the family and the founder are present as owners. Such a firm is treated as familyowned. Note that for both the ownership and the management dimension, the third category is other firms (that is, firms that are 1

See Griliches and Mairesse (1981), as well as Hansen and Hill (1991), for a discussion of research-intensive industries. Most of this information was found in the definitive proxy statement (DEF 14A). The Securities Exchange Act of 1934 requires officers, directors, and five percent owners to disclose their holdings. 3 I added shareholdings of different family members. In the case of several founders, I looked at the respective families of all founders. 2

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Table 1 Monitoring of R&D spending and R&D productivity in family and founder firms. Lone founders as owners

Families as owners

Goals and incentives

Preserving wealth and lifework of the founder

Knowledge about R&D processes Power against management Coordination among owners

Knowledge about the business through founding and developing the business High ownership shares, entrenchment possible

Preserving wealth, heritage, and tradition of the founding family; transfer of the firm to the next family generation; altruism towards other family members possible Knowledge about the business through growing up with the business of the parents High ownership shares, entrenchment possible

Single founder or small founder team

Large family and family conflicts possible

neither family-managed/-owned nor lone founder-managed/-owned). Note also that my classification allows for the possibility that a firm can be managed by a lone founder but owned by a family and vice versa. 5.3. Variables 5.3.1. R&D intensity regressions The dependent variable in the R&D intensity regressions is the ratio of R&D expenditures to assets (R&D/assets). To test the robustness of the results, I also used the variable R&D expenditures to sales (R&D/sales). As expected, the two variables are

Table 2 Variable descriptions. Variable Dependent variables R&D intensity Log (sales) Ownership variables Ownership share of lone founder

Ownership share of family Both family and lone founder are owners Ownership share of institutional investors Supershares

Management variables Management by lone founder Management by family CEO is chairperson CEO tenure duration Firm controls Log (assets) Firm age Cash flow/assets

Description R&D/assets: R&D expenditures (millions of US$) divided by total assets (millions of US$); R&D/ sales: R&D expenditures (millions of US$) divided by total sales (millions of US$) (source: Compustat; data items: AT, SALE, XRD) Natural logarithm of sales (source: Compustat; data item SALE)

Percentage of common stock owned by lone founder; a lone founder is an individual who is one of the company's founders; in these firms, there exist no other family members who own more than five percent of the issued stock; a firm with lone founder ownership thus cannot be a firm with family ownership, nor vice versa (source: manual data collection from the SEC Edgar database) Percentage of common stock owned by members of the founding family; at least two family members are owners (source: manual data collection from the SEC Edgar database) Dummy = 1 if both family and lone founder are present as owners Percentage of stock owned by institutional investors; institutional investors can include large banks, insurance companies or mutual funds (source: manual data collection from the SEC Edgar database) Dummy = 1 if there exists stock that has higher voting than cash flow rights (source: manual data collection from the SEC Edgar database)

Dummy = 1 if lone founder is CEO or chairperson; a lone founder is an individual who is one of the company's founders; in these firms, there exist no other family members who are CEO or chairperson; a firm with lone founder management thus cannot be a firm with family management, nor vice versa (source: manual data collection from the SEC Edgar database) Dummy = 1 if member of the family is CEO or chairperson (source: manual data collection from the SEC Edgar database) Dummy = 1 if CEO is also chairperson of the board (source: manual data collection from the SEC Edgar database) Number of years the CEO has been in office (source: Compustat ExecuComp; data item: BECAMECEO)

Natural logarithm of total assets (source: Compustat; data item: AT) Number of years for which the firm has existed) (source: manual data collection from the firm's Web sites and other sources) Sum of after-tax income, depreciation and after-tax R&D divided by total assets; see Hall (1992) for a discussion of the cash flow measure (source: Compustat; data items: AT, DP, PI, TXT, XRD) Debt/assets Long-term debt (in millions of US$) divided by total assets (in millions of US$) (source: Compustat; data items: AT, DT) Log Market-to-book value is calculated as the market value of equity plus the book value of total debt plus convertible debt and (market-to-book value) preferred stock plus current liabilities minus current assets divided by the book value of total assets (source: Compustat; data items: MKVALF, DT, DCPSTK, CL, CA) Average sales growth Three-year least squares annual growth rate of sales divided by 100 (source: Compustat ExecuComp; data item: SALE3LS) in last three years Industry dummies Six dummy variables indicating observations that pertain to specific industries as follows: ‘chemical and allied products’ (SIC 28), ‘industrial machinery and equipment’ (SIC 35), ‘electronic and other electrical equipment’ (SIC 36), ‘transportation equipment’ (SIC 37), ‘instruments and related products’ (SIC 38) or ‘business services’ (SIC 73)

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strongly correlated (r = 0.65, p b 0.01). In the analyses, I focus on the variable R&D/assets, which is in line with previous studies (Hall, 1993; Hall and Oriani, 2006). The main results, however, remain unchanged when using R&D/sales instead of R&D/assets. In the hypotheses, I distinguish between lone founder-owned and family-owned firms. Hence, there are have two categories: family ownership and lone founder ownership. The variables ownership share of family and ownership share of lone founder represent the percentages of common equity owned by the founding family or the lone founder, respectively. To separate the ownership effects of lone founder or family firms from the management effects (Block, 2010), I include management variables in the regressions: the variable management by lone founder (management by family) is an indicator variable that equals one if the lone founder (a member of the founding family) is CEO or chairperson. Several other variables are used as controls. The variable ownership share of institutional investors controls for the influence of institutional investors and represents the percentage of stock owned by large banks (e.g., Citigroup or JP Morgan), insurance companies (e.g., Prudential Insurance Company or AXA), mutual funds (e.g., Fidelity Investments or Putnam Investments), private equity firms (e.g., KKR or Permira), and large individual financial investors (e.g., Warren Buffet, Kirk Kerkorian, or Philip Anschutz). The variable supershares indicates whether the firm has distributed stock that offers higher voting than cash flow rights (Bebchuk et al., 2000; Chrisman et al., 2004; Claessens et al., 2002). The variable cash flow/assets accounts for the firm's state of liquidity. The firm's market-to-book value is used to control for the firm's market valuation and investment opportunities. To distinguish between fast- and slow-growing firms, I employ the sales growth variable, which gives the three-year least squares annual growth rate of sales. The variables firm size, firm age, and debt/assets are used to account for the size, age, and capital structure of the firm, respectively. The variable CEO tenure duration measures the number of years that the CEO has served as chief executive. The variable CEO is chairperson equals one if the CEO is also chairperson. Dummies are included to control for the six different industries in our sample. Finally, time dummies for the years 1994–2003 are used to control for macroeconomic effects (e.g., the burst of the Internet bubble in 2001). Most of the control variables are taken from the literature regarding the performance of family firms (Anderson and Reeb, 2003; Miller et al., 2007; Villalonga and Amit, 2006) and the literature that focuses on the determinants of R&D intensity (Barker and Mueller, 2002; Baysinger et al., 1991; Bushee, 1998; David et al., 2001). Table 2 describes the variables in more detail and lists the Compustat data items used as sources. Table 3 lists descriptive statistics.

5.3.2. R&D productivity regressions I follow prior literature and measure R&D productivity by the effect of R&D spending on sales (Mairesse and Hall, 1996; Mairesse and Sassenou, 1991). The dependent variable of the R&D productivity regressions is the natural logarithm of sales (log (sales)).4 The main independent variables are the natural logarithm of R&D spending (log (R&D)) and the ownership shares of families and lone founders. The coefficient of the variable log (R&D) measures R&D productivity. It indicates to what degree the firm's sales change (in percent) if the firm increases its level of R&D spending by one percent. To compare R&D productivity in family-owned versus lone founder-owned firms, I include two interaction terms in the regression models: ownership share of lone founder X log (R&D) and ownership share of family X log (R&D). A positive interaction term corresponds to an increase in R&D productivity with family or lone founder ownership. The control variables in the R&D productivity regressions are similar to those of the R&D intensity regressions introduced above.

6. Results 6.1. Descriptive statistics and univariate analyses Using the definition of Miller et al. (2007), approximately 28% of the observations in the sample fall into the category of family firms, and 11% are classified as lone founder firms. Thus, approximately 61% of the observations are neither family nor lone founder firms. These figures are slightly lower than the data in Miller et al. (2007), which may be explained by the fact that the sample only includes research-intensive industries and is based on S&P 500 firms (Miller et al. (2007) use Fortune 1000 firms). The S&P 500 index is made up of large publicly traded firms, whereas Fortune 1000 firms may also be privately held. As noted above, the family firm definition in this paper, distinguishes between the dimensions of ownership and management. Accordingly, 19 observations (zero observations) exist in which the lone founder (family) manages the firm while the family (lone founder) is present as an owner. In addition, there are 47 observations in the dataset in which both the founder and her family have ownership in the firm (41% of all family ownership observations). Table 4 compares family-owned firms with the two categories lone founder-owned firms and other firms using univariate statistics and tests.5 A number of differences can be observed. Family-owned and lone founder-owned firms have lower ownership shares of institutional investors than other firms and they are both relatively more likely to use supershares compared to other firms. Surprisingly, the roles of the CEO and the chairperson are more often separated in family-owned and lone founder-owned firms versus other firms. Lone founder-owned firms are much younger, have less debt, have a higher market-to-book ratio and experience higher sales growth relative to both family-owned firms and other firms. Overall, there are some similarities between 4 I have also estimated the effects of R&D spending on the firm's return on assets (ROA) and the firm's market-to-book value. The results are not reported in the text but can be obtained from the author. 5 To avoid overinflated p-values and to be conservative in our statements, the analysis is limited to the observations in the year 2003. If the entire panel dataset from 1994 to 2003 is used, almost all differences would become significant.

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Table 3 Descriptive statistics. Mean

Median

Std. dev.

0.072 0.104

0.054 0.066

0.061 0.138

0.002 0.001

0.605 1.996

Ownership variables Ownership share of lone founder (in %) Ownership share of family (in %) Ownership share of institutional investors (in %) Supershares (dummy)

0.018 0.030 0.148 0.028

0 0 0.130 0

0.069 0.109 0.121

0 0 0 0

0.702 0.889 0.672 1

Management variables Management by lone founder (dummy) Management by family (dummy) CEO is chairperson (dummy) CEO tenure duration (in years)

0.231 0.037 0.798 6.441

0 0 1 4

Variables R&D intensity (R&D/assets) R&D intensity (R&D/sales)

Firm controls Assets (in billions of $) Firm age (in years) Cash flow/assets Debt/assets Market-to-book value Average sales growth in last three years (in %) Industry dummies SIC 28 (chemical and allied products) SIC 35 (industrial machinery and equipment) SIC 36 (electronic and other electrical equipment) SIC 37 (transportation equipment) SIC 38 (instruments and related products) SIC 73 (business services)

8.947 54.355 0.127 0.208 3.200 0.194

0.196 0.180 0.242 0.097 0.138 0.147

3.031 44 0.134 0.196 2.147 0.099

0 0 0 0 0 0

6.558

27.545 42.644 0.177 0.180 4.058 0.482

Min.

0 0 0 0

0.036 1 −2.363 0 0.245 −0.404

0 0 0 0 0 0

Max.

1 1 1 42

448.507 197 2.555 1.024 77.493 7.432

1 1 1 1 1 1

Note: N = 1,088 observations from 154 firms.

family-owned and lone founder-owned firms. Yet, lone founder-owned firms clearly represent a separate group with its own distinctive characteristics. The univariate statistics do not show large differences between family-owned, lone founder-owned and other firms with regard to the level of R&D intensity. However, the univariate statistics suggest that lone founder firms seem to have a higher R&D productivity relative to other firms: they show a higher median market valuation and a higher median sales growth. However, the results of the univariate analyses should be interpreted cautiously since they do not account for the fact that family or founder ownership is correlated with, e.g., firm size and industry category. Table 5 lists correlations between the variables. As expected, the correlations between the ownership and the management variables are strong, and multicollinearity may be an issue for the sample (e.g., the correlation between the variables ownership share of family and management by family is r = 0.59, p b 0.01), which is why I estimate the regression models using different specifications and evaluate how the results change accordingly. For example, the first model includes the ownership variables but not the management variables; the second model includes the management variables but not the ownership variables; and the third model includes both ownership and management variables. 6.2. R&D intensity regressions Both random- and fixed-effects regressions are estimated. I also used an alternative approach, estimating pooled ordinary least squares regressions and clustering the standard errors by firms and obtained very similar conclusions (results available upon request). Table 6 lists the results of the random-effects regressions; Table 7 reports the results of the fixed-effects regressions. The paper focuses on the results of the random-effects regressions since the research questions relate primarily to cross-sectional results. The results of the random- and fixed-effects models, however, are very similar, suggesting the robustness of the results to alternative model specifications.6 Model I shows the effects of the ownership variables without including management variables. There is a positive effect for the variable ownership share of lone founder (β = 0.148, p b 0.01) and a negative effect for the variable ownership share of family (β = −0.059, p b 0.01) in terms of the level of R&D intensity. In addition, I found a negative effect of the variable ownership share of institutional investors (β = −0.026, p b 0.05). This model explains about 30% of the differences in R&D intensity 6 A Hausman test (Hausman, 1978) showed an insignificant result with regard to the family and founder variables but led to a significant result regarding the control variables (Table 6); a significant result on the Hausman test indicates that the results of the fixed-effects regressions should be given credence over the results of the random-effects regressions.

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Table 4 Univariate analysis. Variable

Governance variables Ownership share of inst. investors Supershares (dummy) CEO is chairperson (dummy) CEO tenure duration (in yrs.) Other variables R&D intensity (R&D/assets) Assets (in bn $) Firm age (in yrs.) Cash flow/assets Debt/assets Market-to-book value Average sales growth in last three years (in %) Sales growth in current year (in %)

Lone founder-owned firms a

Family-owned firms b

Other firms c

Lone founder-owned versus other firms

Family-owned versus other firms

Mean (median)

Mean (median)

Mean (median)

Test of equality of means/ proportions (medians) d

Test of equality of means/ proportions (medians) d

p = 0.023 (p = 0.014) p = 0.310 p = 0.017 p = 0.062 (p = 0.459)

p = 0.004 (p = 0.001) p = 0.196 p = 0.093 p = 0.957 (p = 0.900)

p = 0.413 (p = 0.445) p = 0.851 (p = 0.600) p = 0.001 (p = 0.002) p = 0.766 (p = 0.139) p = 0.001 (p = 0.001) p b 0.001 (p b 0.001) p = 0.074 (p = 0.058)

p = 0.380 p = 0.970 p = 0.956 p = 0.998 p = 0.233 p = 0.711 p = 0.256

p = 0.247 (p = 0.067)

p = 0.965 (p = 0.392)

0.10 (0.10) 0.08 0.54 9.31 (4.00)

0.08 11.12 21.92 0.10 0.06 4.05 0.09

(0.06) (2.85) (22.00) (0.14) (0.01) (3.97) (0.10)

0.39 (0.16)

0.06 (0.06) 0.10 0.60 6.10 (4.00)

0.05 13.92 62.00 0.12 0.17 2.41 0.06

(0.05) (5.56) (60.50) (0.11) (0.17) (2.05) (0.07)

0.16 (0.10)

0.19 (0.17) 0.03 0.82 6.00 (4.00)

0.07 13.39 62.81 0.12 0.24 2.24 0.01

(0.05) (4.46) (57.00) (0.10) (0.23) (1.67) (−0.00)

0.17 (0.05)

(p = 0.409) (p = 0.452) (p = 0.847) (p = 0.395) (p = 0.385) (p = 0.325) (p = 0.087)

Notes: N = 140 obs. (lone founder-owned firms = 13 obs.; family-owned firms = 10 obs.; other firms = 117 obs.) To avoid overinflated p-values in the statistical tests, the analysis is limited to the observations in the year 2003. a The lone founder owns at least five percent of common equity. b Members of the founding family own at least five percent of common equity. c Neither the lone founder nor a member of the founding family own at least five percent of common equity. d All tests are two-sided.

between firms. Model II focuses on the management variables without including ownership variables. Except for the negative effect of the variable management by family (β = −0.014, p b 0.05), no significant effects of the ownership and management variables can be recorded. The R²-value is also lower. The model explains only 27% of the differences in R&D spending between firms. Model III includes both the ownership and the management variables. As with Model I, I conclude that a higher ownership share for lone founders increases the level of R&D spending (β = 0.153, p b 0.01), whereas higher ownership shares for both family owners (β = −0.052, p b 0.01) and institutional owners (β = −0.027, p b 0.05) decrease the level of R&D spending. None of the management variables exerts a significant effect. Finally, Model IV combines the lone founder and family variables into a combined variable, as in many other prior studies (Anderson and Reeb, 2003; Block, 2010; Dyer and Whetten, 2006). The combined ownership variable exhibits no detectable effect (β = 0.003, p N 0.1). The explanatory power of the model drops by 4% (R²-between of 0.28 in Model IV versus R²-between of 0.32 in Model III). In summary, the results suggest that it makes sense to differentiate ownership by family members from ownership by lone founders. Ceteris paribus, a 10 percent increase in lone founder ownership leads to an increase of 1.5 percentage points for research intensity (from 7.2% to 8.7%), whereas a 10 percent increase in family ownership leads to a decrease of 0.5 percentage points (from 7.2% to 6.7%). Without this distinction being taken into account, the two opposing effects balance each other out and no significant effect is detectable (see Model IV). As a further robustness check, I included the ratios of lone founder ownership to ownership by institutional investors and family ownership to ownership by institutional investors. The former ratio shows a significant positive effect; the latter ratio shows a nonsignificant result, which makes sense since both ownership by family members and ownership by institutional investors is shown to have a negative effect on the level of R&D intensity (see Model III, Table 6). In sum, the results of the R&D intensity regressions support Hypothesis 1 that lone founder-owned firms invest more resources in R&D relative to other firms. They also support Hypothesis 3 that family-owned firms invest less resources in R&D relative to lone founder-owned firms. In fact, the coefficient is even negative, implying that family-owned firms invest less resources in R&D relative not only to the group of lone founder-owned firms but also to the group of other firms. The best model explains about 30% of the variance of the dependent variable (Model III, Table 6). The remaining variation can be explained by individual characteristics of the managers in our sample (Barker and Mueller, 2002; Kaplan, 2008) and specifics of the business model that are not captured by our two-digit industry variable.7 To verify the robustness of the results, I used R&D/sales as a dependent variable. The results suggest similar conclusions and can be secured from the authors. For example, a 10 percent increase in lone founder ownership leads to an increase of 3.0 percentage points for research intensity (from 10.4% to 13.4%). As another robustness check, a regression is estimated in which a dummy variable is inserted controlling for the fact that there are cases where both the family and the founder are present as owners. The dummy variable showed an insignificant result in both fixed and random-effects regressions; the coefficients of the family and founder ownership variables remain largely unchanged or even show slightly higher significance values (variable ownership share of family in Model VI, Table 7). 7 See the OECD Main Science and Technology Indicators (MSTI) database at http://www.oecd.org/document/33/0,3343,en_2649_34451_1901082_1_1_1_1,00. html (accessed February 6th, 2010).

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Table 5 Correlations and variance inflation factors. 1 1 2

3 4

5 6 7 8 9 10 11 12 13 14 15

16 17

R&D intensity (R&D/assets) Ownership share of lone founder Ownership share of family Ownership share of institutional investors Supershares Management by lone founder Management by family CEO is chairperson CEO tenure duration log (assets) Firm age Cash flow/assets Debt/assets log (marketto-book value) Average sales growth in last three years SIC 36 Year 2003

2

3

4

5

6

7

8

9

10

11

12

13

14

0.19

15

16

VIFs

1.58

−0.10 −0.07

1.76

−0.03 −0.17 −0.19

1.33

0.06 0.25

0.23 0.18 −0.12 0.39 −0.10 −0.10 −0.03

−0.08 −0.05

0.59 −0.15

−0.15 −0.09 −0.08 0.01 −0.30 −0.44 0.01 −0.30 0.37 0.07

0.11

0.09

1.25 1.76

0.27 −0.11

1.78

0.03 −0.21 −0.12

1.33

0.04 −0.10 −0.06

0.35 −0.08

0.21

1.40

−0.06 −0.04 −0.31 0.10 −0.15 0.02 0.09 −0.07 −0.24 −0.03 0.00 0.02 −0.45 0.02 0.26 −0.15 0.44 −0.06 0.03 −0.03 −0.07 0.06 −0.00 −0.06 0.11 −0.04 −0.07 −0.21 −0.05 0.10 −0.05 −0.16 −0.03 0.15 −0.05 0.25 0.35 −0.15 0.28 0.03 −0.09 −0.05 0.38 −0.03 −0.25 0.14 −0.37 −0.45 0.30 −0.35 0.40

0.01 −0.03

0.14 0.03 −0.01 −0.03 −0.02 −0.04

0.01 0.08

0.01

0.32 −0.03 −0.17

0.02 −0.26 −0.29

0.17 0.15 0.22 −0.08 0.08 −0.14 0.02 −0.03 −0.00 −0.01 −0.01 0.13

0.02 −0.16

1.86 1.97 1.23 1.31 2.15 0.43

1.53

0.10 −0.07 −0.09 0.06 0.02 1.83 0.04 −0.02 0.02 −0.06 −0.14 0.01 1.91

Notes: N = 1088 observations from 154 firms; VIF = variance inflation factor (calculated for Model III in Table 5). Correlations with an absolute value greater than 0.06 have a p-value≤0.05. The Pearson correlation coefficient is used for metric variables, the point-biserial correlation coefficient is used in the event one variable is dichotomous, and Cramer's V is used if both variables are dummy variables.

6.3. R&D productivity regressions Table 8 shows the random- and fixed-effects R&D productivity regressions. The elasticity of R&D spending on sales is between 0.14 (random-effects model) and 0.18 (fixed-effects model), which is in line with other studies (Hall and Mairesse, 1995; Mairesse and Hall, 1996). Thus, raising R&D spending by 10 percent leads to an average increase of sales by 1.4 or 1.8 percent. The included interaction terms have the expected signs and support Hypotheses 2 and 4. R&D spending has a greater effect on sales in lone founder-owned firms relative to other firms (ß = 0.386, p b 0.01, random-effects model). Contrary to that, the interaction term related to family-owned firms shows a nonsignificant result (ß = 115, p N 0.10, random-effects model). A test on the equality of the two interaction effects yields a significant result (p b 0.05) for both the random- and the fixed-effects model. Thus, the elasticity of R&D spending on sales differs for lone founder-owned versus family-owned firms. As noted above, I also estimated R&D productivity regressions with other dependent variables such as the firm's ROA or market-to-book-value. In these regressions, however, no significant differences were found between family-owned and lone founder-owned firms. 6.4. Results regarding control variables The effects of the control variables are as expected (see Tables 6 and 7). Younger and smaller firms invest relatively more in R&D than older and larger firms (Acs and Audretsch, 1988). Attractive investment opportunities as indicated by a high market-tobook value of the firm have a positive effect on R&D spending (Fazzari et al., 1988; Lee and O'Neill, 2003). There exist fluctuations of R&D spending over time: an F-test of joint significance of the year dummies shows a significant result (p b 0.01). 6.5. Limitations As with most empirical studies, certain limitations apply. The sample includes only large, publicly traded firms; family or lone founder owners may behave differently according to whether the firm is listed on the stock market. Family conflicts might be more severe in privately owned companies because, in such cases, the capital market does not monitor the owners' actions. Another limitation concerns the fact that our sample only includes U.S. firms. The U.S. system of corporate governance differs in many respects from the continental European and Asian systems of corporate governance. Finally, the measurement of the management variables could be further refined. This paper only reports information about the CEO and the chairperson of the board of directors.

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Table 6 Random-effects regressions of R&D intensity (R&D/assets).

Independent variables Ownership variables Ownership share of family or lone founder Ownership share of lone founder Ownership share of family Ownership share of institutional investors Ownership share of lone founder/ownership share of institutional investors Ownership share of family/ownership share of institutional investors Supershares

Model I

Model II

Model III

Model IV

Model V

β (SE)

β (SE)

β (SE)

β (SE)

β (SE)

0.003 (0.028) 0.148 (0.057)*** −0.059 (0.019)*** −0.026 (0.012)**

0.153 (0.057)*** −0.052 (0.020)*** −0.027 (0.012)**

−0.026 (0.012)** 0.0017 (0.0006)*** −0.0001 (0.0001)

−0.000 (0.016)

0.000 (0.016)

Management variables Management by family or lone founder Management by lone founder Management by family CEO is chairperson CEO tenure duration

0.007 (0.017)

−0.003 (0.015)

−0.006 (0.008) −0.002 (0.010) −0.014 (0.007)** −0.003 (0.005) −0.0003 (0.0002)

−0.006 (0.010) −0.009 (0.007) −0.003 (0.004) −0.0003 (0.0002)

−0.003 (0.005) −0.0003 (0.0002)

−0.004 (0.010) 0.013 (0.007) −0.004 (0.005) −0.0003 (0.0002)

Cash flow/assets Debt/assets Log (market-to-book value) Average sales growth in last three years Industry dummies (five categories)a Year dummies (nine categories)b

−0.015 (0.003)*** −0.0003 (0.0001)*** −0.028 (0.019) 0.004 (0.012) 0.008 (0.003)** −0.017 (0.003)*** p = 0.930 p = 0.002

−0.014 (0.003)*** −0.0003 (0.0002)*** −0.029 (0.019) 0.002 (0.012) 0.009 (0.004)** −0.013 (0.003)*** p = 0.761 p = 0.002

−0.015 (0.003)*** −0.0003 (0.0001)*** −0.027 (0.019) 0.003 (0.012) 0.008 (0.004)** −0.016 (0.003)*** p = 0.854 p = 0.002

−0.015 (0.003)*** −0.0003 (0.0001)*** −0.029 (0.019) 0.003 (0.012) 0.009 (0.004)** −0.013 (0.003)*** p = 0.719 p = 0.002

−0.014 (0.003)*** −0.0003 (0.0001)*** −0.028 (0.019) 0.003 (0.012) 0.009 (0.004)** −0.015 (0.003)*** p = 0.864 p = 0.002

N obs. (firms) Obs. per group min./avg./max. Wald chi² (df) R² within/between/overall

1088 (154) 1; 7.1; 10 125.97 (23) *** 0.13; 0.31; 0.26

1088 (154) 1; 7.1; 10 116.1 (23) *** 0.12; 0.27; 0.24

1088 (154) 1; 7.1; 10 129.32 (27) *** 0.13; 0.32; 0.26

1088 (154) 1; 7.1; 10 113.77 (25) *** 0.12; 0.28; 0.24

1088 (154) 1; 7.1; 10 129.57 (26) *** 0.13; 0.33; 0.27

Firm controls Log (assets) Firm age

Notes: SE = heteroscedasticity-robust standard errors. aReference group is SIC 36 (electronic and other electrical equipment). b Reference group is year 2003. *p b 0.10; **p b 0.05; ***p b 0.01 (two-sided tests).

It would be preferable to also record whether other board members have familial ties to these individuals. Such a more refined management variable would allow analyzing nonlinear relationships in the effects of family or founder management. 7. Discussion In summary, strong evidence is found that founder ownership has a positive impact on both R&D intensity and R&D productivity (Hypotheses 1 and 2). Moreover, I conclude that family-owned firms have a lower level of R&D intensity and R&D productivity (Hypotheses 3 and 4) than founder-owned firms. In the following subsections, I discuss these results and the contributions to the literature. 7.1. Entrepreneurship as a context for R&D spending: founders as effective monitors Entrepreneurs are seen as innovators who introduce new products to markets or create new production methods, thereby inducing technological change and progress (Schumpeter, 1934). A number of studies have analyzed the innovation-inducing role of entrepreneurs in the start-up or nascent entrepreneurship phase (e.g., Acs et al., 2009; Cliff et al., 2006; Koellinger, 2008). However, many firm founders stay with their firms and continue to play an important role in their firms as the firm ages (He, 2008; Nelson, 2003). So far, little is known about the effects of founder involvement on firm innovation in this later phase. This paper addresses this gap. It is shown that founder involvement as an owner in a later phase of the firm (in our study: post-IPO) still has a positive impact on the firm's innovation processes. This finding may be explained by the fact that founders as owners have a great deal of experience with the firm's products and the underlying business models and that they have a strong power position within the firm. They are able to translate this deep level of understanding and strong power position into an advantage in the monitoring of the management's R&D decisions. To sum up, exposure to entrepreneurship matters in reducing the asymmetric information (Akerlof, 1970; Leland and Pyle, 1977; Myers and Majluf, 1984; Thakor, 1990) and moral hazard problems (Campbell and Marino, 1994; Hirshleifer and Thakor, 1992; Narayanan, 1985) associated with R&D spending decisions.

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Table 7 Fixed-effects regressions of R&D intensity (R&D/assets).

Independent variables Ownership variables Ownership share of family or lone founder Ownership share of lone founder Ownership share of family Both family and lone founder are owners Ownership share of institutional investors

Model I

Model II

Model III

Model IV

Model V

Model VI

β (SE)

β (SE)

β (SE)

β (SE)

β (SE)

β (SE)

0.004 (0.049) 0.155 (0.067)** −0.049 (0.036)

0.156 (0.070)** −0.046 (0.038)

−0.028 (0.013)**

−0.028 (0.013)**

Ownership share of lone founder/ownership share of institutional investors Ownership share of family/ownership share of institutional investors Supershares −0.026 (0.004)***

−0.026 (0.004)***

Management variables Management by family or lone founder

0.156 (0.067)** −0.055 (0.028)* 0.004 (0.009) −0.028 (0.018)**

−0.027 (0.013)**

−0.026 (0.004)***

0.001 (0.000)*** −0.000 (0.000) −0.027 (0.004)***

−0.026 (0.004)***

−0.006 (0.011) −0.006 (0.015) −0.005 (0.008) −0.003 (0.005) −0.000 (0.000)

−0.006 (0.016) −0.006 (0.007) −0.003 (0.005) −0.000 (0.000)

−0.003 (0.005) −0.000 (0.000)

−0.006 (0.016) −0.005 (0.008) −0.004 (0.005) −0.000 (0.000)

−0.023 (0.005)*** 0.002 (0.001)** −0.028 (0.018) 0.013 (0.013) 0.005 (0.004) −0.012 (0.003)*** p = 0.003

−0.023 (0.005)*** 0.002 (0.001)** −0.027 (0.018) 0.012 (0.012) 0.005 (0.004) −0.015 (0.004)*** p = 0.004

−0.024 (0.005)*** 0.002 (0.001)** −0.027 (0.018) 0.012 (0.013) 0.005 (0.004) −0.012 (0.003)*** p = 0.041

−0.022 (0.005)*** 0.002 (0.001)** −0.028 (0.019) 0.012 (0.013) 0.005 (0.004) −0.013 (0.004)*** p = 0.045

−0.023 (0.005)*** 0.002 (0.001)** −0.027 (0.018) 0.012 (0.014) 0.005 (0.004) −0.015 (0.004)***

Year dummies (nine categories)a

−0.023 (0.005)*** 0.002 (0.001)** −0.027 (0.018) 0.013 (0.014) 0.005 (0.004) −0.015 (0.004)*** p = 0.004

N obs. (firms) Obs. per group min./avg./max. F-test of model significance R² within/between/overall

1088 (154) 1; 7.1; 10 p b 0.01 0.15; 0.14; 0.10

1088 (154) 1; 7.1; 10 p b 0.01 0.13; 0.16; 0.11

1088 (154) 1; 7.1; 10 p b 0.01 0.15; 0.14; 0.10

1088 (154) 1; 7.1; 10 p b 0.01 0.14; 0.17; 0.12

1088 (154) 1; 7.1; 10 p b 0.01 0.14; 0.13; 0.10

1088 (154) 1; 7.1; 10 p b 0.01 0.15; 0.14; 0.10

Management by lone founder Management by family CEO is chairperson CEO tenure duration

Firm controls Log (assets) Firm age Cash flow/assets Debt/assets Log (market-to-book value) Average sales growth in last three years

Notes: SE = heteroscedasticity-robust standard errors. aReference group is year 2003. *p b 0.10; **p b 0.05; ***p b 0.01 (two-sided tests).

7.2. Agency costs in family and lone founder firms As noted above, R&D investments may involve information asymmetries between a firm's owners and its management team (Akerlof, 1970; Leland and Pyle, 1977; Myers and Majluf, 1984; Thakor, 1990) as well as moral hazard on the part of the managers undertaking R&D decisions (Campbell and Marino, 1994; Hirshleifer and Thakor, 1992; Narayanan, 1985). Both issues can lead to an underinvestment problem with R&D (Hall, 2002). Yet, moral hazard may also lead to an overinvestment problem with R&D (Jensen, 1986; Vogt, 1994). Family or lone founder firms are considered different from an agency perspective (Chrisman et al., 2004), in particular regarding agency costs from the separation of ownership and management (Fama and Jensen, 1983; Jensen and Meckling, 1976) and regarding agency costs from altruism (Schulze et al., 2001, 2003). The findings of my paper support this view. It is found that the agency problems with R&D spending are less severe in lone founder-owned firms than they are in other firms: lone founder-owned firms invest more resources in R&D and show a higher productivity of R&D spending (Hypotheses 1 and 2). Lone founders as owners thus seem to be more effective monitors relative to other firm owners, which mitigates the moral hazard problem in the context of firm management. In addition, lone founders as owners have a good understanding of the business, which reduces information asymmetry regarding R&D investments. In this manner, the paper contributes to the literature on corporate governance and strategic management in lone founder firms (He,

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Table 8 R&D productivity regressions (dependent variable: log (sales)). Random-effects models

Fixed-effects models

Independent variables

β (SE)

β (SE)

β (SE)

β (SE)

Log (R&D)

0.135 (0.020)***

0.117 (0.020)***

0.176 (0.022)***

0.151 (0.022)***

Ownership variables Ownership share of lone founder Ownership share of family Ownership share of institutional investors Supershares

−0.893 (0.289)*** −0.186 (0.197) −0.249 (0.074)*** 0.132 (0.116)

−2.733 (0.505)*** −0.618 (0.325)* −0.249 (0.073)*** 0.121 (0.115)

−1.601 (0.349)*** −0.615 (0.224)*** −0.266 (0.071)*** 0.151 (0.131)

−3.441 (0.505)*** −0.966 (0.321)*** −0.266 (0.071)*** 0.174 (0.130)

Moderation variablesb Ownership share of lone founder X log (R&D) Ownership share of family X log (R&D)

0.386 (0.088)*** 0.115 (0.078)

0.444 (0.090)*** 0.101 (0.081)

Management variables Management by lone founder Management by family CEO is chairperson CEO tenure duration

−0.102 (0.046)*** 0.022 (0.083) −0.061 (0.022)*** 0.004 (0.002)***

−0.094 (0.045)** 0.019 (0.082) −0.065 (0.022)*** 0.004 (0.002)**

−0.068 (0.050) −0.053 (0.088) −0.058 (0.022)*** 0.005 (0.002)***

−0.055 (0.086) −0.055 (0.049) −0.063 (0.022)*** 0.004 (0.002)***

Firm controls Log (assets) Firm age Debt/assets Industry dummies (five categories)a Year dummies (nine categories)c

0.632 (0.022)*** 0.006 (0.001)*** −0.256 (0.052)*** p b 0.01 p b 0.01

0.624 (0.022)*** 0.006 (0.001)*** −0.260 (0.052)*** p b 0.01 p b 0.01

0.535 (0.023)*** −0.000 (0.004) −0.233 (0.051)***

0.530 (0.023)*** 0.001 (0.004) −0.238 (0.051)***

p b 0.01

p b 0.01

N obs. (firms) Obs. per group min./avg./max. F-test/Wald-test of model significance R² within/between/overall

1088 (154) 1; 7.1; 10 p b 0.01 0.82; 0.88; 0.88

1088 (154) 1; 7.1; 10 p b 0.01 0.83; 0.88; 0.88

1088 (154) 1; 7.1; 10 p b 0.01 0.82; 0.83; 0.81

1088 (154) 1; 7.1; 10 p b 0.01 0.83; 0.85; 0.84

Notes: SE = heteroscedasticity-robust standard errors. aReference group is SIC 36 (electronic and other electrical equipment). bA test on the equality of coefficients of moderator variables is significant (p b 0.05) in both random- and fixed-effects models. cReference group is year 2003. *p b 0.10; **p b 0.05; ***p b 0.01 (two-sided tests).

2008; Nelson, 2003; Willard et al., 1992). Lone founder firms benefit from lower agency costs from the separation of ownership and management, which lead to higher R&D intensity and R&D productivity. In contrast, it is found that family ownership reduces the level of R&D intensity and R&D productivity as compared to lone founder-owned firms (Hypotheses 3 and 4), and even compared to other firms. I suggest that family ownership is associated with agency costs, which more than offset the potential agency benefits of family ownership, such as a long-term perspective through an intended ownership transfer to later family generations (Grassby, 2001; Handler, 1994; James, 1999; Lansberg, 1999; Tagiuri and Davis, 1992) or effective monitoring due to high ownership shares and a thorough understanding of the firm's business (Miller and Le Breton-Miller, 2005; Ward, 2004). I argue that families as owners may face a coordination problem with their monitoring efforts. Family firms are often characterized by conflicts within the owning family that originate from sibling rivalry, identity conflict, children's desires to be different from their parents or different goals of individual family members with regard to the development of the firm (Dyer, 1994; Eddleston and Kellermanns, 2007; Schulze et al., 2001, 2003). Thus, family ownership seems not to be associated with superior corporate governance as has been suggested elsewhere (Anderson and Reeb, 2003; Chrisman et al., 2004). The opposite seems to be true: family ownership creates new agency costs which lead to lower R&D intensity and R&D productivity relative to comparable lone founder-owned firms and other firms. Finally, the nonsignificant findings with regard to family or lone founder management suggest that family- or lone foundermanaged firms do not suffer from problems of managerial entrenchment (Morck et al., 2005; Morck and Yeung, 2003)—at least not to a greater extent than comparable firms. Thus, differences in agency costs between the three groups of family firms, lone founder firms, and other firms (Chrisman et al., 2004) should be attributed to the ownership and not the management dimension of these firms. 7.3. Entrepreneurial orientation of family and lone founder firms Keeping the entrepreneurial spirit alive is essential to the survival of a family business and must be properly managed in the context of an intergenerational transition for the firm (Habbershon and Pistrui, 2002). Some authors argue that the patient capital provided by family owners creates a favorable environment for entrepreneurial activities (Aldrich and Cliff, 2003; Rogoff and Heck, 2003). The desire to transfer ownership to the next family generation helps the family firm to recognize and exploit new opportunities, which are a core element of entrepreneurship. R&D intensity is correlated with three specific dimensions of entrepreneurial orientation: innovativeness, willingness to take risks, and being proactive (Lumpkin and Dess, 1996). What do the results of this paper tell us about the entrepreneurial orientation of family and lone founder firms?

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In adopting R&D intensity as a proxy for certain aspects of entrepreneurial orientation, I report results suggesting that familyowned firms score lower in certain aspects of entrepreneurial orientation than do other types of firms, in particular, lone founderowned firms. Family ownership is found to be negatively associated with R&D intensity. At first glance, this finding seems surprising and may be inconsistent with prior work (Arregle et al., 2007; Zahra, 2005). However, it can be explained by the idea that, over time, family firms may become hostile to change and may elect to pursue conservative strategies that limit future growth (Beckhard and Dyer, 1983; Miller et al., 2010; Stavrou, 1999; Zahra et al., 2004). This tendency may be seen as being a result of the agency costs of altruism (Schulze et al., 2001, 2003). Family owners often face a situation in which those who are not involved in the business will demand high dividends or other (financial and nonfinancial) benefits from the firm. In fact, such individuals may have an incentive to overstate their actual needs. Such a situation damages the entrepreneurial spirit and the firm is regarded as a “cash cow” for its owners. Second generation family owners have inherited the firm and usually did not create it themselves. Their main ambition is to secure the firm's survival and its dividend payments. Relative to founders as owners, they are less concerned about firm growth. Accordingly, the firm strategy of family firms will be less risky and more conservative as compared to the strategy of founder firms. Alternative explanations are manifold and may include a founder's reluctance to hand over the business at the appropriate time, inadequate attention given to grooming future leaders, or difficulty integrating competent non-family employees into the firm. In fact, the organization can end up in a state of ‘strategic simplicity’ in which routines that succeeded in the past may be used repeatedly (Miller, 1993). Emotional attachment to the firm and the role of family owners also being family nurturers may further increase this tendency toward conservatism (Miller et al., 2003). Thus, the family's social capital and its influence on the firm's social capital not only has positive implications such as increased cooperation and coordination (Arregle et al., 2007) but may also lead to conservatism and low-growth strategies (Miller et al., 2010). The paper's findings show that family-owned firms differ markedly from lone founder-owned firms. In fact, the data suggest that lone founder-owned firms will invest more in R&D and have a higher R&D productivity than comparable other firms. This distinction is new in the literature regarding entrepreneurial orientation and entrepreneurship in family firms (Kellermanns and Eddleston, 2006; Kellermanns et al., 2008; Naldi et al., 2007; Salvato, 2004; Short et al., 2009; Zahra, 2005; Zahra et al., 2004). The transition from a lone founder-owned firm to a family-owned firm thus seems to be associated with a decrease in entrepreneurial orientation. 7.4. Long-term orientation of family and founder firms The level of R&D intensity has been used in a number of studies as a proxy for long-term orientation (Bushee, 1998; David et al., 2001; Graves, 1988; Hansen and Hill, 1991). The argument is that the costs of R&D are incurred in the near term, whereas the payoffs from R&D are likely to occur only over the long term. Much of the literature about family firms considers family firms to be more long-term oriented than other firms (Arregle et al., 2007; Bertrand and Schoar, 2006; Block, 2009, 2010; James, 1999; Le Breton-Miller and Miller, 2006; Miller and Le Breton-Miller, 2005; Short et al., 2009; Zellweger, 2007). In light of this paper's results, I suggest that this argument should be used more cautiously. I conclude that family ownership is negatively correlated with R&D spending, which suggests that firms with a family shareholder actually invest less in long-term projects than do other firms. I further conclude that a stronger degree of long-term orientation cannot explain why family firms exhibit performance that is superior to that of non-family firms (Anderson and Reeb, 2003; Le Breton-Miller and Miller, 2006). The data suggest that this argument applies only to lone founder-owned firms. 7.5. Distinction between family and lone founder firms This study offers a methodological contribution regarding the definition of family firms (Astrachan et al., 2002; Handler, 1989; Klein et al., 2005). The findings indicate that substantial differences exist between family and lone founder firms. Depending on the specific research question, it might, therefore, not be appropriate to classify these two types of companies under the same category (note that our results become nonsignificant in this case: see Model IV in Tables 6 and 7). The paper thus confirms the results of Miller et al. (2007, 2010), who find that family firms and lone founder firms differ markedly in terms of financial performance and growth strategy. By regarding ownership and management as separate dimensions of family and lone founder firms, we extend the classification of Miller et al. (2007). I show that the effects of the management and ownership dimensions go in different directions for family and lone founder firms. Hence, it makes sense to differentiate between firms according to these dimensions when categorizing family or lone founder firms (Klein et al., 2005). There is an important implication of this distinction for empirical research about the effects of family/founder ownership and management on strategy. If one examines only family/founder ownership or family/founder management, or conducts separate estimations for either one, an omitted variables bias can occur. By contrast, if one combines both dimensions into one variable, the effects attributed to this variable may be ambiguous or misleading. 7.6. Investors and R&D intensity This paper concludes that family ownership and lone founder ownership do impact R&D intensity and its productivity. To date, the literature has only analyzed the effect of institutional ownership, as with pension funds or mutual funds (Baysinger et al., 1991; Bushee, 1998; David et al., 2001; Graves, 1988; Hansen and Hill, 1991). I argue that because a large number of firms in the economy

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are either family- or lone founder-owned (La Porta et al., 1999), focusing only on institutional ownership means failing to paint a complete picture of how different types of investors and forms of corporate governance can influence innovation. 8. Implications for practice I note practical implications for family and lone founder firms. The paper's findings show that family firms invest less in R&D than do other firms. As a result, family firms may weaken their competitiveness. Lone founder firms are found to invest more in R&D relative to other firms. But what happens when a lone founder firm turns into a family firm? I argue that, over time, family firms may become hostile to change and will follow conservative strategies that limit future growth (Miller et al., 2010). Some family members may no longer be involved in the business and may instead view the firm primarily as a source of personal income. They no longer have the deep knowledge about the firm that is required to do effective monitoring, particularly about R&D decisions. In fast-changing environments such as R&D-intensive industries, ineffective R&D monitoring can be a threat to the firm's competitiveness (and survival). Family firms should be aware of this tendency and take appropriate measures. They may wish to follow the example of the German multigenerational family firm known as the Freudenberg Group.8 This firm is currently owned by more than 300 family members. As protection against ‘unhealthy’ demands from its owners, the company has implemented a plan in its ‘family constitution’ to limit the dividends paid out to (family) owners, thereby enabling the management to consistently invest in projects that are important to the future of the firm. In addition, all 300 family members are constantly updated about the current developments and challenges the firm faces via regional conferences, internal newsletters, etc. Another practical implication concerns the positive role of lone founder ownership with regard to the monitoring of R&D processes. The paper's results suggest that it makes sense to involve founders in the monitoring of the firm's operations, even when they are no longer active in the management of the firm. 9. Conclusions This is the first research effort to analyze R&D intensity and its productivity in family and lone founder firms relative to other firms. Due to its long-term horizon and the stronger alignment of ownership and management, most other research to date has hypothesized that family firms should exhibit a higher level of R&D intensity than non-family firms (Anderson and Reeb, 2003, James, 1999). However, I did not find any evidence of family firms investing more in R&D. I found the opposite to be true: family firms seem to invest less in R&D than non-family firms. In addition, I identified major differences between family and lone founder firms. The latter group seems to invest more in R&D than other firms. This finding provides a contribution to the entrepreneurship literature. Entrepreneurs contribute to innovation not only by founding new firms based on innovative business ideas (Acs et al., 2009; Cliff et al., 2006; Koellinger, 2008), but also through effective monitoring of R&D processes in later phases of the firm. This study suggests new opportunities for future research. One avenue would be to examine more closely the different types of family firms. This study's dataset is confined to large publicly listed U.S. firms and, thus, is certainly not representative of all firms. Furthermore, I suggest that other researchers explore the following two questions: is there a difference in terms of R&D spending between private and publicly listed family firms; and what is the nature of R&D spending in a family firm when there is a conflict within the owning family? One may also investigate, in greater depth, why and in which situations family firms seem to spend less on R&D as compared to other firms, perhaps by using qualitative research methods such as case studies. Acknowledgements Comments from Oliver Alexy, Joachim Henkel, Peter Jaskiewicz, Dietmar Harhoff, Oliver Klöckner, Phil Phan, Roy Thurik, and two anonymous reviewers are much appreciated. The author is indebted to Andreas Thams for his research support and enormous help on earlier versions of the paper. 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