LAUSR

PurposeThis paper tests for a positive, a negative and a nonlinear relationship between the share of ownership controlled by firm managers and the management decision to invest in research and development (R&D). Likewise, it examines whether or not institutional investors induce corporate managers with ownership stakes to spend on R&D.Design/methodology/approachIt examines a sample of the United Kingdom (UK) Financial Times Stock Exchange (FTSE) all-shares firms over a longitudinal period from 2009 to 2018. The R&D is measured by the natural logarithm of a firm's R&D spending and a firm's R&D expenditure scaled by its total assets at the end of the year. The results are estimated using the year/industry fixed effects as well as the firm fixed effects.FindingsThe results show a positive effect on R&D spending at a lower level of managerial ownership, and a negative impact at a higher managerial ownership level. The findings jointly suggest an inverse U-shaped nonlinear relationship between ownership by firm managers and management decisions on R&D spending. The results also demonstrate that the effect of institutional investors' ownership on R&D spending decisions is observable only at a lower level of managerial ownership and disappears at a higher level.Practical implicationsThe results shed the light on the role of managerial ownership in promoting firm innovation. They suggest an optimal level of equity ownership by corporate managers that maximizes R&D spending, implying that firms can effectively manage their R&D spending by restructuring their managerial ownership to maintain an appropriate level of managerial ownership to align managerial interests with shareholder interests by either increasing it to the optimal level or decreasing it when it becomes above this level. The findings also support the limited degree of monitoring and the long-term perspective offered by institutional investors in the UKOriginality/valueThe study provides new evidence on the non-monotonic effect of the share of ownership controlled by firm managers on R&D spending decisions. It also expands the growing body of literature and contributes to the debate on the effectiveness of institutional investors in the UK.