Do Blockholder Incentives Matter? Evidence from Firm Innovation

53 Pages Posted: 15 Nov 2018

See all articles by Chinghung (Henry) Chang

Chinghung (Henry) Chang

National Taiwan University - College of Management

Yung-Ling Chi

National Chung Hsing University

Wesley Kuo

National Chung Hsing University - Department of Finance

Stephanie Tsui

City University of Hong Kong (CityUHK) - Department of Accountancy

Date Written: November 2, 2018

Abstract

We examine whether institutional investors with short-term incentives affect firms’ innovation performance. We find that firms with a greater concentration of transient and quasi-indexer institutional investors are associated with lower innovation performance, as measured by patents and citations. To address potential endogeneity, we exploit the positive liquidity shocks brought by the decimalization in 1997 and 2001 and find consistent evidence. The negative effect of concentrated short-term institutional investors is strengthened when managers’ own wealth is more sensitive to the stock price. In addition, firms with concentrated short-term investors are less likely to engage in explorative innovation. We nevertheless also find that the negative effect on innovation can be mitigated by sound corporate governance, as measured by the presence of independent directors, dedicated investors and product market competition. Overall, our findings support the view on institution-induced investment distortion.

Keywords: institutional investors, myopic behavior, innovation, investment horizon

JEL Classification: G20, G34, O31

Suggested Citation

Chang, Ching-Hung and Chi, Yung-Ling and Kuo, Wesley and Tsui, Stephanie, Do Blockholder Incentives Matter? Evidence from Firm Innovation (November 2, 2018). Available at SSRN: https://ssrn.com/abstract=3277269 or http://dx.doi.org/10.2139/ssrn.3277269

Ching-Hung Chang

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

Yung-Ling Chi

National Chung Hsing University ( email )

402, No. 250 Kuo Kuang Road, Taiwan
Taichung, Taiwan
China

Wesley Kuo

National Chung Hsing University - Department of Finance ( email )

250 Kuo Kuang Road
Taichung, 402
Taiwan

Stephanie Tsui (Contact Author)

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Register to save articles to
your library

Register

Paper statistics

Downloads
30
Abstract Views
215
PlumX Metrics