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Innovation and Institutional Ownership

  • Philippe Aghion

    (Harvard University and CEPR)

  • John Van Reenen

    (London School of Economics (LSE), Centre for Economic Performance, NBER and CEPR)

  • Luigi Zingales

    (University of Chicago, NBER and CEPR)

We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2010.99.

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Date of creation: Jul 2010
Date of revision:
Handle: RePEc:fem:femwpa:2010.99
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  1. Bronwyn Hall, 2004. "The financing of research and development," Chapters, in: Financial Systems, Corporate Investment in Innovation, and Venture Capital, chapter 2 Edward Elgar.
  2. Pruitt, Stephen W & Wei, K C John, 1989. " Institutional Ownership and Changes in the S&P 500," Journal of Finance, American Finance Association, vol. 44(2), pages 509-13, June.
  3. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
  4. Renée B. Adams & Daniel Ferreira, 2007. "A Theory of Friendly Boards," Journal of Finance, American Finance Association, vol. 62(1), pages 217-250, 02.
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