Are Passive Institutional Investors Engaged Monitors or Risk-Averse Owners? Both!

50 Pages Posted: 28 Oct 2020 Last revised: 29 Apr 2021

See all articles by Xuan Tian

Xuan Tian

Tsinghua University - PBC School of Finance

Yuanchen Yang

International Monetary Fund

Date Written: September 8, 2020

Abstract

We differentiate the effects of passive institutional investors on firms’ innovation activities and innovation strategies. With larger passive institutional ownership, while firms’ countable innovation activities increase, they shift their innovation strategies by focusing more on exploitation of existing knowledge rather than exploration of new technology. Enhanced monitoring by passive institutional investors through active votes could explain their positive effects on firms’ innovation activities. Increasing risk aversion by passive institutional investors appears the underlying force that drives firms’ shift to incremental innovation. Our paper uncovers a subtle relation between institutional investors and innovation, which is largely ignored by earlier studies.

Keywords: Passive Institutional Investors, Innovation, Exploitation, Exploration

JEL Classification: G23, G30, O16, O31

Suggested Citation

Tian, Xuan and Yang, Yuanchen, Are Passive Institutional Investors Engaged Monitors or Risk-Averse Owners? Both! (September 8, 2020). Available at SSRN: https://ssrn.com/abstract=3688800 or http://dx.doi.org/10.2139/ssrn.3688800

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Yuanchen Yang

International Monetary Fund ( email )

United States

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