Variations in R&D Investments of Family and Nonfamily Firms: Behavioral Agency and Myopic Loss Aversion Perspectives

TLDR

The behavioral agency model predicts that loss‑averse family firms invest less in R&D to preserve socioemotional wealth, yet this conflicts with the prevailing view that family firms pursue long‑term investment. The study reconciles this conflict by integrating myopic loss aversion, hypothesizing that family firms invest less but more variably in R&D, except when performance falls below aspiration levels, when their R&D spending rises and variability shrinks relative to nonfamily firms. The authors analyze 964 publicly held family and nonfamily firms in the S&P 1500 from 1998 to 2007 to test these hypotheses. The analysis confirms that family firms invest less and more variably in R&D than nonfamily firms, but when performance is below aspiration, their R&D spending increases and variability decreases, highlighting the need to account for family firm heterogeneity.

Abstract

The behavioral agency model suggests that to preserve socioemotional wealth, loss-averse family firms usually invest less in R&D than nonfamily firms. However, behavioral agency model predictions are inconsistent with the well-accepted premise that family firms have a long-term investment orientation. We reconcile these seemingly incompatible predictions by adding insights from the myopic loss aversion framework, which deals with the impact of decision-making time horizons. The combination of these two prospect theory derivatives led us to hypothesize that family firms usually invest less in R&D than nonfamily firms but the variability of their investments will be greater owing to differences in the compatibility of long- and short-term family goals with the economic goals of a firm. However, when performance is below aspiration levels, we theorize that family goals and economic goals tend to converge. In this situation, the R&D investments of family firms are expected to increase and the variability of those investments decrease, relative to nonfamily firms. Analysis of 964 publicly held family and nonfamily firms from the Standard & Poor's 1500 between 1998 and 2007 support our hypotheses, confirming a need to take the heterogeneity of family firms more fully into account.