Managerial ownership, entrenchment and innovation

Agency theory suggests that managers might under-invest into R&D for reasons of risk tied to project failure, such as reduced remuneration and job loss. However, managers have also an incentive to over-invest into innovation for reasons of growth, implying higher remuneration, power and prestige. Using a sample of 1406 Belgian firms, we find, first, that managers holding no company shares under-invest into R&D compared with 100% owners giving rise to the risk argument. Second, we find an inverse u-shaped relationship between the degree of managerial ownership and R&D. This indicates that managers become entrenched, i.e. powerful enough to pursue their own interests. When entrenched, managers do not fear detrimental effects of risky innovation projects on their career and tend to over-invest into innovation for reasons of growth.