How Do Foreign Institutional Investors Enhance Firm Innovation?

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

Financial Management Association Annual Meeting (2015)

Kelley School of Business Research Paper No. 2014-04

Entrepreneurial Finance and Innovation Conference (2014)

Financial Integrity Research Network Research Topic Group Meeting in Corporate Finance (2013)

84 Pages Posted: 17 Mar 2014 Last revised: 28 May 2017

See all articles by Hoang Luong

Hoang Luong

School of Economics, Finance, and Marketing, RMIT University

Fariborz Moshirian

Institute of Global Finance, UNSW Business School

Lily Nguyen

La Trobe University; Financial Research Network (FIRN)

Xuan Tian

Tsinghua University - PBC School of Finance

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Date Written: December 1, 2016

Abstract

We examine the effect of foreign institutional investors on firm innovation. Using firm-level data across 26 non-U.S. economies between 2000 and 2010, we show that foreign institutional ownership has a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which foreign institutions affect firm innovation: foreign institutions act as active monitors, provide insurance for firm managers against innovation failures, and promote knowledge spillovers from high-innovation economies. Our paper sheds new light on the real effects of foreign institutions on firm innovation.

Keywords: Foreign institutional investors; Firm innovation; Monitoring; Tolerance for failure; Knowledge spillovers

JEL Classification: G23; G32; G34

Suggested Citation

Luong, Hoang and Moshirian, Fariborz and Nguyen, Lily and Tian, Xuan and Zhang, Bohui, How Do Foreign Institutional Investors Enhance Firm Innovation? (December 1, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming; Financial Management Association Annual Meeting (2015); Kelley School of Business Research Paper No. 2014-04; Entrepreneurial Finance and Innovation Conference (2014); Financial Integrity Research Network Research Topic Group Meeting in Corporate Finance (2013). Available at SSRN: https://ssrn.com/abstract=2409909 or http://dx.doi.org/10.2139/ssrn.2409909

Hoang Luong

School of Economics, Finance, and Marketing, RMIT University ( email )

445 Swanston Street
Melbourne, VIC 3000
Australia

Fariborz Moshirian

Institute of Global Finance, UNSW Business School ( email )

Sydney, NSW 2052
Australia
+61 2 93855859 (Phone)
+61 2 94877519 (Fax)

Lily Nguyen

La Trobe University ( email )

Melbourne, VIC, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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