Do Transient Institutional Investors Really Impede Innovation? Evidence from Shareholder Distraction

Abstract

This paper challenges the stereotypical view that transient institutional investors, characterized by short-term horizons, exacerbate managerial myopia and harm corporate innovation. Our evidence implies that the results of previous studies may have been biased due to endogeneity issues. To address this, a novel measure of shareholder distraction is introduced. We show that an exogenous decline in the monitoring quality of distracted transient institutional shareholders is associated with decreased innovation. This effect is more pronounced when alternative monitoring forces are weaker. The findings suggest that transient institutional investors provide effective monitoring, which acts as a channel that helps alleviate managerial myopia and promote innovation, confirming the theoretical work of Edmans (2009). The validity of our findings is further confirmed through a rich battery of robustness tests.

Keywords: transient institutional investor, shareholder distraction, monitoring, corporate innovation

JEL Classification: G23, G30, O30