Innovation and Institutional Ownership

We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection.


Issue Date:
2010-08
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/93414
Total Pages:
65
JEL Codes:
G20; G32; O31; O32; O33
Series Statement:
IM
99.2010




 Record created 2017-04-01, last modified 2017-08-22

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