Family firm and R and D cost behavior

Abstract

We examine whether family firms have more tendency to maintain R and D investment when sales fall than non family firms using R and D costs behavior. While R and D investment is important for the sustainable growth of the firm, it is characterized by long investment horizons and high uncertainty resulting in an earnings decline in immediate periods. Therefore, managers have incentive to cut R and D when the performance of the firm is bad. Regarding this, we examine whether family firms alleviate this problem with long term orientation horizons and better monitoring of the firm. Specifically, stickiness in R and D costs were used as a proxy for sustained investment by forward looking managers when sales fall and analyze firm's R and D adjustment decision. Costs are sticky when costs increase more for increases in sales than they decrease for decreases in sales. Cost stickiness occurs when managers retain slack resources in response to a demand drop. When dividing the sample into family firms and non family firms, we find that R and D costs are sticky in family firms but not in non family firms. It indicates that family firms have a tendency to maintain R and D investment when sales fall whereas, non family firms do not. On the other hand, additional test shows that SG and A costs behavior does not differ among family firms and non family firms. These results imply that family firms and non family firms make resource adjustment decisions differently regarding R and D which represents long term investment. However, they do not share a similar pattern regarding SG and A costs which includes a broader category of costs. Overall results imply that ownership structures do matter in organizations and that family firms make different strategic choices compared to non family firms. This study contributes to the literature that examines various factors that affect R and D investment decision. This study also adds to the growing literature on cost stickiness and family ownership. © 2015 Academic Journals Inc.