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1 - Corporate Ownership Structure and Its Impacts On
1 - Corporate Ownership Structure and Its Impacts On
1 - Corporate Ownership Structure and Its Impacts On
Introduction
59
explain the role of the ownership structure in the innovation development based on
corporate governance cognitive theories.
In fact, in a context where innovation occupies a central position, the industrial
leaders1 may be allowed to participate in the strategy formulation, especially in the
preliminary stage of the strategic decision-making. By implementing information,
expertise and other cognitive resources, the industrial leader-shareholder also allows the
protection of the shareholders interests through identifying the companys operational
problem and selecting adequate-decision choices which aim at protecting the
shareholders interests (Ginsberg, 1994).
However, the participation of corporate governance system in developing the
innovative activities could be affected by the leaders motivation to reduce such
investments and maximise profits (Garcia-Meca et al., 2005). Moreover, within the
framework of delegating some of his power, the leader can use his/her hierarchical
authority to deliver inaccurate information which would allow him/her to feel
comfortable.
Owing to their specificity, the innovation activities require the main shareholders
commitment. In this respect, ownership concentration is highly critical to support the
learning, and innovation processes, as both these elements require a long-term
commitment on behalf of the companys shareholders. Thus, an examination of the main
shareholders power, who holds the control, paves the way for examining the extent
success of his cognitive contribution in achieving the innovative projects. Actually, the
shareholders stability and long-term orientation is likely to facilitate the innovation
process development. Nevertheless, this situation could be appeased by an opportunistic
behaviour from the part of the companys owners through either imposing their
superiority to conceal information or postponing the training programmes (essentially
subjective or psychological problems). In this sense, these shareholders could be,
somewhat, sensitive to the market evolution or to the technology influence by carefully
proceeding to evaluating the innovation activities performance.
In addition, during the financing stage, investments in innovation are subject to a
careful examination by the institutional investors including the bankers (Hoskisson and
Turk, 1990). In this context, the high level of assets makes it too difficult for the bank to
assess and evaluate such investments, which implies that the information and knowledge
asymmetries will persist between the bank and the project holder. In this respect, bankers
are likely to act as mechanisms of filtering and interpreting data according to their own
cognitive values. Hence, the institutional shareholder is considered as a contributor of not
only financial resources, but also of skills and knowledge (Ocasio and Joseph, 2005).
However, the institutional investors short term orientation may reduce the companies
commitment to support their innovation strategies. Consequently, investing in the R&D
or innovation is likely to be threatened by such investors behaviour.
Taking these considerations into account, along with the available critical
examination regarding the innovation process, this article aims at answering the
following question: What effect does ownership structure have on the firms innovative
activities?
The major purpose of this study is to investigate the ownership structures impact
(industrial shareholder-leaders, ownership concentration and institutional ownership) on
the firms innovative activities. Our research area with Tunisia as an example of
developing countries being engaged, since 1997, in an important national programme
aiming at helping the Tunisian firms face the global competition. This national
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J. Chouaibi
programme has been intended to restructure the Tunisian firms by encouraging them to
promote material and non-material investment in order to stimulate innovation leading to
competitive advantage.
In addition, the establishment of a scientific research system and technological
innovation has helped develop the manufacturing sector. Following the promulgation of
new legal texts and the creation of structures, consisting of skilled human resources
capable of responding to specific requirements of research performance, some positive
outcomes are likely to develop. Thus, the average expenditure on the Tunisian research
and development in relation to GDP (0.78%) exceeds the average of the European public
expenditure to GDP (0.69%). This shows a strong determination by Tunisia to improve
its technological position.
Finally, this article proposes an original framework whereby it provides convenient
answers to the impact of ownership structure on the Tunisian companies innovation
level. Thus, this study attempts to provide some explanations and managerial solutions
for the Tunisian companies suffering from a lack of innovation. Based on the
identification of governance mechanisms that have the greatest impact on technological
innovation, this research provide some relevant insights to managers and the different
types of shareholder. The decision to consolidate the industrial leaders ownership can
help mitigate the problems of under-innovation investment of the Tunisian companies,
thus they can reach the ranks of the most competitive firms.
The remainder of this paper is organised as follows. The second section contains the
presentation of the basic theoretical background and hypotheses development. In this
section, we test the relationship between the ownership structure and innovation
activities. Section 3 displays the methodology pursued in this study. As for the empirical
results, they are exposed and discussed in Section 4. Finally, the fifth section
encompasses the concluding remarks and the discussions of our findings and their
implications.
Within the framework of this study, an evolutionary approach to innovation has been
adopted. It considers that the innovation process is complex and uncertain (Thornhill,
2006). Indeed, companies are considered as complex organisations and should be treated
as an entity encompassing an amalgamation of diverse varieties. More explicitly, their
role is no longer confined merely to supply incentives and resolve agency problems; they
are rather considered as institutions and forums of innovation as well as a directory of
knowledge and learning promotion (Thornhill, 2006). Hence, under the urgent need for
companies to pursue and implement innovative strategies, a more thorough examination
of the corporate governance systems appears to be critically essential. Following a
contractual approach, the corporate governance mechanisms are merely seen as a
prospect of cutting agency and transaction costs. While under the cognitive approach
directives, the corporate governance mechanisms are considered as tools which enhance
value creation by privileging skills, innovating capacities, and above all, by better
exploiting knowledge (Lazonick and OSullivan, 2000). More specifically, as far as this
research is concerned, we are interested in the impact of the managers property features,
the property concentration and the institutional property necessary for promoting
companies innovation activities.
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J. Chouaibi
background, would have specific information which is likely to allow them to reach the
critical resources and efficiently master the uncertainty and risk overwhelming
technological innovation. The cognitive skills the leader enjoys will be further
consolidated by his participation in the capital. He detains the information and, above all,
the knowledge to manage the company which is considered as a forum for innovation. In
this sense, the main efforts concern the management of the cognitive costs rather than the
transaction or the agency costs. Even in the traditional agency theory, if the leader may
find an interest in innovation to improve the benefit of his managerial latitude to the
detriment of the lenders, he may also face encounter the problem of a failing project. This
justifies the need for a professional leaders detaining cognitive knowledge useful to
project development.
As a result, the cognitive contribution, which the industrial leader enjoys, exceeds the
problem of managerial opportunism described by the agency theory in the specific
projects. On the basis of this development, the following hypothesis can be proposed:
Hypothesis (H1)
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J. Chouaibi
65
The firms size, its affiliation sector and the firms listing on the stock exchange have
been included to control the relationship between the ownership structure and innovation.
A number of authors have suggested that these variables might influence the firms
innovation level (e.g., Wu, 2008).
Research design
where
INVTIND
dependent variable
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J. Chouaibi
independent variables
control variables
0, 1,,6
parameters to estimate
195 firms.
Variables
Code
Definition
Innovation index
INVTIND
Property of the
industrial leader
INDSHLED
Property
concentration
OWNCONC
Property of
institutional investor
INSTIOWN
Firm size
LOGTA
Sector
SECT
Listed firms
LIST
companies financial statements published in the official bulletins of the Tunis Stock
Exchange
67
Our sample contains a total number of 95 Tunisian industrial firms, among which 17 are
listed on the Tunis Stock Exchange while 78 are not. The concerned firms have been
interviewed over a three year period ranging from 2004 to 2006. The choice of this period
is based on the recommendations of the Oslo manual of the OECD (1997) as well as the
empirical studies on the subject available in different contexts (Flor and Oltra, 2004; Wu,
2008). In this study, we are exclusively interested in the manufacturing firms. Table 2
highlights the sample companies and their sectoral affiliations.
Table 2
Sector
Number of firms
Agro-alimentary
Chemicals
Mechanics and metals
Textiles and clothing
Electrical and electronic material equipment
Construction materials, pottery ceramics and glass industry
Information technology and communication
Total number of firms
30
8
10
12
15
9
11
95
It is worth noting that the Statistical Package for Social Sciences (SPSS)
software (version 11.0) under Windows has been used to analyse the collected data.
Multiple-linear regressions have been applied to determine the important predictors. The
relationship between ownership structure and firms innovation level has been tested by
using multiple linear regression models.
Table 3 presents the correlation coefficients between the various explanatory
variables used in this model. As can be noticed, the results presented in this table show
that no coefficient exceeds the threshold of 0.7 as the limit set by Kervin (1992).
Table 3
Correlation coefficients
Variables
INDSHLED
CONCOWN
INSTIOWN
INDSHLED
CONCOWN
0.035
INSTIOWN
0.029
0.073
LOGTA
0.100
0.162
0.0.022
SECT
0.097
0.122
0.182
LIST
0.004
0.122
0.257
LOGTA
SECT
LIST
1
1
0.051
0.017
The intercorrelations for all the explanatory variables have been examined by applying
the variance inflation factors (VIF). The VIF analysis reveals no sign of multicollinearity,
and the VIF values corresponding to all the independent variables range from 1.017 to
1.094; far below the acceptable upper bound of 10. The VIF has been reported, for each
regression, to demonstrate the model stability.
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J. Chouaibi
In fact, both tests suggest that the regression estimates are not degraded by the
presence of multicollinearity. Furthermore, they consistently yield a Durbin-Watson
statistics. This statistics is equal to 0.798, which indicates that the autocorrelation
constitutes no problem.
The empirical results demonstrate that 24 % of the variation in the innovation level is
explained by variables related to the ownership structure and to the control variables. As
for the statistics of Fisher (F), which are equal to (4.875), they confirm the good quality
of the model at a significant threshold level lower than 1%. Hence, the model
explanatory power seems to be satisfactory since Fishers statistics (F) appears to be
significant at the threshold of 1 %. Consequently, we tend to reject the null hypothesis
and turn to stipulate that regression is generally significant. It can be concluded that the
model is statistically significant and explanatory for the studied phenomenon. As for the
significance of the independent variables, it can be stated that all the variables are
statistically significant. As far as the significance of the independent variables is
concerned, we can deduce that all the variables are statistically significant. Concerning
the control variables introduced into the model, the results show that they have not been
statistically significant.
Table 4 depicts beta coefficients, t Student and significance along with a VIF of the
model.
Table 4
Variables
Coefficients b
t-student
Significance
VIF
1.129
4.194
0.000**
INDSHLED
0.0945
4.510
0.000***
1.017
CONCOWN
0.215
2.974
0.004***
1.056
INSTIOWN
0.113
1.834
0.070*
1.094
LOGTA
0.067
0.022
0. 819(n.s)
1.036
SECT
0.0244
0.331
0.741 (n.s)
1.077
LIST
0.0407
0.471
0.639 (n.s)
1.044
Model statistics
F = 4.875 (p = 0.000)
R2 = 0.249, R2 adj = 0.198
D-W = 0.798
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These results show that the increasing contribution of the industrial leaders to the
companys capital has a positive and significant impact on promoting innovation. This
result highlights the leaders cognitive contribution to the development of innovation
projects.
Consequently, in a context of risk and uncertainty pertaining to innovative investment
projects, decision-makers are brought to have certain tools of power on the resources for
the purpose of investing them on a certain innovative process. This reminds us of the
conditions required by a corporate governance system in a bid to support innovation by
relying, among other things, on organisational learning (Lazonick and OSullivan, 2000).
Yet, in companies pursuing an innovative policy, where an important mass of information
and knowledge has been produced and analysed, the professional leaders are found in a
position in which they are not capable of dealing with this massive volume of information
concerning the innovation investment projects. Moreover, these projects specificity
makes of knowledge possession an asset for the major purpose of improving the
decisions quality (Haleblian and Rajagopalan, 2006). In this case, the leader, who
simultaneously assumes both targeted roles; as an owner and as an industrialist, helps
increase the perspectives of growth by detaining information and knowledge; elements on
which the innovation strategies are based (Fosfuri and Trib, 2008). It turns out that the
medium-term or long-term industrial logic is set against the short-term financial logic for
the industrial leaders. The opposition between the industrial logic and the financial logic
is explained by the fact that the development of innovation projects relies simultaneously
on the how to do know how as well as on the state of being a decision-maker.
Besides, the previous results give evidence that the difference and divergence of
interests and the asymmetry of information represent obstacles which slow down or
even impede the innovation projects success (Cherif, 1999; Rubinstein, 2001). Moreover,
the rigidity of the corporate governance system could prevent the leaders from launching
unsafe investments projects in terms of innovation. The problems of moral risk
and adverse selection are obviously imperative, too. Nevertheless, the results achieved
by this study, and which are based on the shareholders cognitive contribution, show that
the previously-mentioned risks do not represent such constraints as to impede the
company in innovating. Hence, the leader, who contributes in the capital, is mainly the
one who is well formed and trained either in engineering or in technology, he is not an
instigative factor bound to improve the companys innovative capacity in the Tunisian
context.
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J. Chouaibi
conclusions of the cognitive waves of corporate governance. Hence, in some cases, and
by relying on the postulates of the agency theory, the main shareholder is not stimulated
to make any commitment in certain specific and risky projects such as the development
of innovation projects (Jensen, 2004). As a result, he turns to withdraw his commitment
for the sake of protecting his proper financial capital. On the contrary, if he detains
knowledge about the growth opportunities pertaining to these projects, he will certainly
be in favour of applying such investments. In this respect, the main shareholders
decisions are related to these mental plans concerning the innovation projects. Hence, our
empirical results confirm our assumption denoting that the shareholders cognitive
contribution is strengthened by the control margin he enjoys. Nevertheless, in such a
specific context, as the development of innovation projects, the possession and mastering
of the financial and cognitive capital is an asset to stimulate these activities. As a result,
the concentration of ownership, particularly in cases when the appropriate shareholders
maintain their participation for a long period, highly stimulates long-term investments in
innovation. The concentration of ownership can, therefore, be regarded as a form of
financial commitment and financial integration necessary for most innovative companies
(Tylecote and Ramirez, 2006). Still, adopting a wider perspective, outlooking the
corporate governance system as being a question of agency and conflict, the presence of a
stable major shareholder could be a positive sign for companies pursuing long-term
innovative strategies. For instance, Hansen and Hill (1991) assert that firms with
concentrated shareholding tend to adopt investments on a quite long temporal horizon.
On the contrary, in firms with scattered shareholding, an important decline of stock
market prices could drive the minority shareholders to give up their securities and,
consequently, expose the firm to attempts of takeovers. This confirms the fact that the
controlling block holders are less concerned about the fluctuation in the short-term results
and more directed to the investments on long temporal horizon maximising their longterm wealth. Besides, having major controlling block holders helps the company benefit
from his knowledge in strategic investments so as to correctly estimate the leaders
behaviour. However, in companies with no major owners, the leaders tend to maximise
the short-term profits, thus, sacrificing the long-term objectives concerning the
development innovation investments.
Besides, the main shareholders behaviour is justified by the superiority of the
information and knowledge he enjoys in the domain of investments pertaining to the
activities of innovation. Nevertheless, in firms with scattered shareholding, an important
decline in stock market prices could drive the minority shareholders to give up their
securities and to, consequently, expose the firm to attempts of takeovers. The leaders, for
fear of losing their jobs, are bound to oppose these takeovers by targeting their decisions
to short-term investments liable to generate fast cash flow in an attempt to appease the
fall in prices, and, consequently, reduce investments in innovation.
71
by Cherian (2000) have shown that the institutional investors have had a negative effect
on the R&D expenses.
The results reached throughout the hypotheses (H1 and H2) have demonstrated that
the development of innovation related projects is essentially achieved via the owners
commitment. Yet, according to the third hypothesis result, the institutional shareholders
contribution has had a negative and significant impact on the innovation level. This
shows that the acquired knowledge and detention of specific information pertinent to the
development of the innovation projects are critically the most decisive elements in
explaining and highlighting the shareholders commitment. This also explains the passive
behaviour of the institutional investors promoting such projects. In this way, the
institutional investors participation in the capital does have a negative outcome on the
development of innovation activities led by the Tunisian companies. It is actually the
major explanation that could be drawn on the basis of these results regarding the lack of
information these investors have demonstrated relating to the investment innovation
projects. Furthermore, these results stress the fact that detaining the financial resources is
by itself not enough to carry out the investment projects as the latter require a deep and
thorough understanding of the nature and the technology of such projects.
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J. Chouaibi
innovation, we intend to conduct a future study based on live speeches, interviews, and
verbal conservations conducted with the company decision-makers.
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Notes
1
This article proposes another model, based on the cognitive role directing and contribution
of competences that the shareholders often keep. It is possible to consider this model as a
component of a corporate governance theory extended to cognitive variables.