Corporate Governance Effects on Innovation when both Agency Costs and Asset Specificity Matter

The paper explores the question whether the relationship between corporate governance and innovation is affected by the extent to which the firm is exposed to agency problems and asset specificity issues. In particular, we argue that different combinations of asset specificity and agency costs are associated to firm age and sector of activity and predict heterogenous effects of ownership concentration on innovation across different types of firms. We use a unique dataset on about 35.000 Italian manufacturing corporations over the 2002-2007 period and run a hurdle model, distinguishing four sub-groups of firms on the basis of their age (greater or lower than 15 years) and of whether they belong to a high technology or low technology sector. We find that the effects of ownership concentration on innovation are coherent with the predictions of so-called "shareholder theory" when agency cost effects dominate over asset specificity effects and that they are coherent with the predictions of so-called "stakeholder theory" when asset specificity effects dominate over agency cost effects. These findings are robust to a number of identification issues, including the possible endogeneity of corporate ownership structures. Our results may allow to make sense of the contradictory findings of the literature on corporate governance and innovation, especially as regards the role played by ownership concentration, and may help policy-makers to define more effective type-specific initiatives to stimulate firm innovation.