| Before subprime lending crisis came, Shanghai index slumped from 6,000 to 4,000. After that, economic crisis invaded, the index plunged to 1,500. In August this year, Shanghai and Shenzhen index tumbled 25. 81%, the second biggest range of monthly drops in the past 15 years. The capital market in China is still weak and speculative. When the stock market is in a huge shock, institutional investors are always blamed. How to regulate and constraint institutional investors'behavior?R&D is very important for a corporation not only in strengthening its competition but also in relating to the long-term development of the enterprise. Therefore, this paper examines whether institutional investors create or reduce incentives for corporate managers to reduce investment in research and development (R&D) to meet short-term earnings goals from the perspective of R&D. Many critics argue that the frequent trading and short-term focus of institutional investors encourages managers to engage in such myopic investment behavior. Others argue that the large stockholdings allow managers to focus on long-term value rather than on short-term earnings. I examine these competing views by testing whether institutional ownership affects R&D spending for firms, while mangers have to make a decision between a decline in earnings and a reduction in R&D. In order to prove that point, I collect the sample includes all firm-years between 2002 and 2008 with available data, use the Logistic Regression Method. The results indicate that mangers are less likely to cut R&D to meet short-term earnings when institutional ownership is high, implying that institutional investors serve a monitoring role in reducing pressures for myopic behavior. A possible explanation for negative relation between institutional holdings and the decision to cut R&D is that institutions prefer to invest in more innovative firms that are unlikely to cut R&D in any circumstance. I assume that managers use last year's earnings per share as their earnings target, divide this sample into two groups. One is called EPS=1, whose EPS has increased relative to the prior year, the other is EPS=-1, whose EPS has declined compared to the last year. The relation between percentage of institutional holding and the decision to cut R&D is significantly negative in group EPS=-1, otherwise, the other group isn't relative, which denies the possible explanation. Further, this paper suggests several effective measures to improve our capital market. |
