Institutional Investors and Medical Innovation

The Quarterly Review of Economics and Finance, 2018

Posted: 22 May 2019 Last revised: 24 May 2019

See all articles by Omer Unsal

Omer Unsal

Merrimack College - Girard School of Business - Department of Accounting and Finance

Blake Rayfield

Indiana State University - Scott College of Business; Networks Financial Institute

Date Written: May 17, 2018

Abstract

In this research paper, we investigate if institutional investors influence corporate innovation in the US pharmaceutical industry. We hand collect unique datasets from the Food and Drug Administration (FDA), including drug patents, drug approvals, medical device approvals, and Phase I-II-III drugs under clinical testing. We find that higher institutional ownership has a positive, causal effect on firm innovation. We document that institutional ownership increases the number of FDA approved products. Then, we examine the innovation quality and find that institutional ownership reduces the likelihood of both drug recalls and market withdrawals. Our results investigate possible underlying mechanisms through which institutional investors provide faster and more frequent innovation outcomes: Institutional holdings act as active monitors by providing insurance for firm executives against innovation failures. Our article sheds new lights on the real effects of institutional investors on pharmaceutical firms’ innovation.

Keywords: Institutional ownership, Firm innovation, Pharmaceuticals

JEL Classification: G30, O30, G32

Suggested Citation

Unsal, Omer and Rayfield, Blake, Institutional Investors and Medical Innovation (May 17, 2018). The Quarterly Review of Economics and Finance, 2018. Available at SSRN: https://ssrn.com/abstract=3384830

Omer Unsal (Contact Author)

Merrimack College - Girard School of Business - Department of Accounting and Finance ( email )

315 Turnpike St
North Andover, MA 01845
United States

Blake Rayfield

Indiana State University - Scott College of Business ( email )

800 Sycamore Street
Terre Haute, IN 47809
United States

Networks Financial Institute ( email )

Indianapolis, 46208
United States

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