Passive Institutional Investors and Corporate Innovation

70 Pages Posted: 9 Jul 2019 Last revised: 26 May 2020

See all articles by Yang Liu

Yang Liu

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

Yao Shen

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

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

Using an instrumental variable approach that exploits an exogenous variation of passive institutional ownership caused by Russell 1000/2000 index reconstitution, we find that greater passive institutional ownership leads to improvement in corporate innovation measured by patent quantity and quality. Our results are robust to alternative setup of regression discontinuity design and a refinement to improve the approximation of the end-of-May market capitalization that Russell uses for index assignment. We identify three channels for such effect: first, the increased presence of passive institutional investors transfers more power to the manager; second, passive institutional ownership reduces the likelihood of CEO turnover especially for firms that outperform 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, Passive 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

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