Innovation and Institutional Ownership

Philippe Aghion, John van Reenen () and Luigi Zingales

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: 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, webuild a model that nests the lazy-manager hypothesis with career-concerns, where institutional ownersincrease managerial incentives to innovate by reducing the career risk of risky projects. The datasupports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitutioneffect between institutional ownership and product market competition (and managerial entrenchmentgenerally), the career-concern model allows for complementarity. Empirically, we reject substitutioneffects. Second, CEOs are less likely to be fired in the face of profit downturns when institutionalownership is higher. Finally, using instrumental variables, policy changes and disaggregating by typeof owner we find that the effect of institutions on innovation does not appear to be due to endogenousselection.

Keywords: Innovation; institutional ownership; career concerns; R&D; productivity (search for similar items in EconPapers)
JEL-codes: O31 O32 O33 G20 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-com, nep-ino, nep-ipr and nep-mic
Date: Written
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Related works:
Working Paper: Innovation and Institutional Ownership (2009)
Working Paper: Innovation and Institutional Ownership (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:cep:cepdps:dp0911

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