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The effect of institutional blockholders' short-termism on firm innovation: Evidence from the Korean market

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  • Kang, Sanggyu
  • Chung, Chune Young
  • Kim, Dong-Soon

Abstract

This study examines how the behavior of institutional blockholders affects investment in research and development (R&D) in Korean firms. Contrary to the monitoring view that institutional investors promote firms' R&D, the results of this study indicate that institutional blockholders have a significantly negative influence on R&D investment. More importantly, when we decompose institutional blockholdings according to institutions' national origins and investment horizons, we find that firms with higher foreign short-term blockholdings spend significantly less on R&D than other firms do. These results show that when the local characteristics of the Korean market (i.e., a predominance of owner-manager firms and weak corporate governance) prevail, institutional monitoring is not effective, and, thus, institutional blockholders tend to focus on the short term. Overall, in the Korean market, stronger short-termism hinders institutional monitoring and negatively affects firms' R&D investments.

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  • Kang, Sanggyu & Chung, Chune Young & Kim, Dong-Soon, 2019. "The effect of institutional blockholders' short-termism on firm innovation: Evidence from the Korean market," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    • Handle: RePEc:eee:pacfin:v:57:y:2019:i:c:s0927538x18306383
    DOI: 10.1016/j.pacfin.2019.101188
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    Cited by:

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    More about this item

    Keywords

    Firm innovation; R&D; Institutional blockholding; Corporate governance; Chaebol; Emerging market;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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