Do Blockholder Incentives Matter? Evidence from Firm Innovation
53 Pages Posted: 15 Nov 2018
Date Written: November 2, 2018
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: Suggested Citation