Common Institutional Ownership and Diffusion of Innovation

Abstract

We investigate how institutional ownership affects the diffusion of innovation. We find that a higher intensity of patent citations among firms that share institutional owners. We address the potential endogeneity of common ownership using two approaches. First, we use regression discontinuity analysis around the Russell 1000/2000 index reconstitutions. When a firm switches indexes, it receives more citations from firms in the index it joins. Second, we find similar results looking at patent citations among firms affected by mergers between financial institutions. These results suggest that institutional investors can facilitate the diffusion of innovation among their portfolio firms.

Keywords: Finance and Innovation; Patents; Common Institutional Ownership

JEL Classification: G23, G30, O30