Technology Rhetoric and Institutional Ownership

Abstract

This paper compares actual R&D spend with the managerial rhetoric around technology and innovation contained within corporate disclosures of publicly-listed U.S. firms. We find that, whilst actual R&D spend and patents do not entice institutional investors to increase their stock holdings, firms that espouse technology and innovation in their corporate disclosures are quite successful in drawing in short-term investors. We frame this investor behavior within the economics of expectation literature. Whilst managers are incentivized to draw in capital, short-horizon investors are less likely to exert due diligence and are rather persuaded by a technology narrative − i.e., a “gold rush” effect. This explains our finding that when there is a sudden downturn with stock price crashes, short-term investors rush to withdraw their money from firms that talk tech. Our findings have implications for managerial rewards systems, especially when these encourage managerial hype.

Keywords: Managerial narratives, technology, innovation, institutional ownership, short-termism, R&D, patents, speculative bubbles

JEL Classification: G30, G32, D22, O30