The Real Effects of Local Mutual Funds: Evidence from Corporate Innovation

Abstract

This paper investigates whether the proximity between mutual funds and firms could explain corporate innovation. I find that local mutual funds tend to increase firms’ R&D expenditures and productivity. Firms with greater local ownership produce more patents and patents with bigger impact. The positive relations are more pronounced for firms with low information quality and poor corporate governance. Further, local funds with more innovative firms outperform the ones with less innovative firms. Finally, firms with higher local ownership are less likely to fire CEOs who engage in innovation, which incentivizes CEOs for risky investments.

Keywords: Local Mutual Fund, Corporate Innovation, Monitoring Effectiveness, Information Advantage

JEL Classification: D82, G23, G32, O30