Passive Institutional Investors and Corporate Innovation

52 Pages Posted: 9 Jul 2019 Last revised: 29 Jul 2019

See all articles by Yang Liu

Yang Liu

Southwestern University of Finance and Economics (SWUFE) - School of Accountancy

Yao Shen

Baruch College (CUNY)

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Qijian Wang

Lingnan College, Sun Yat-sen University

Date Written: June 1, 2019

Abstract

We study the effects of passive institutional investors on corporate innovation. The existing literature has shown a negative relation between the two, and in some cases, no relation. When we apply an instrumental variable approach based on Russell 1000/2000 index reconstitution to explore an exogenous variation of passive institutional ownership, we find that higher passive institutional ownership leads to more corporate innovation measured in terms of both patent quantity and quality. These results are in line with the evidence established in the existing literature that passive institutional investors play a key role in influencing corporate governance choices. In addition, we show three more channels: first, passive institutional investors are passive monitors in the sense that their increased presence allows more flexibility and transfers more power to the firm’s management; second, passive institutional ownership reduces the likelihood of CEO turnover especially for firms that are outperforming their industry peers; third, greater passive institutional ownership is associated with a wider adoption of non-executive employee stock options, which helps incentivize innovative activities.

Keywords: Corporate Innovation, Investment, Institutional Investors, Quasi-Indexers

JEL Classification: G23, G30, O31

Suggested Citation

Liu, Yang and Shen, Yao and Wang, Jun and Wang, Qijian, Passive Institutional Investors and Corporate Innovation (June 1, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-07-02. Available at SSRN: https://ssrn.com/abstract=3415513 or http://dx.doi.org/10.2139/ssrn.3415513

Yang Liu

Southwestern University of Finance and Economics (SWUFE) - School of Accountancy ( email )

55 Guanghuacun St
Sichuan, 610072
China

Yao Shen

Baruch College (CUNY) ( email )

55 Lexington Ave
New York, NY 10010
United States

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Qijian Wang (Contact Author)

Lingnan College, Sun Yat-sen University ( email )

No 135 Xingang W Road
Guangzhou, 510275
China

HOME PAGE: http://lingnan.sysu.edu.cn/en/faculty/wangqijian

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