Abstract:

We find that institutional ownership in publicly traded companies is associated with more innovation (measured as cited-weighted patents), even after controlling for a possible endogeneity of institutional ownership. To explore the mechanism through which this link arises, we build a model that nests managerial laziness with career-concern considerations, where institutional ownership increases the incentives managers have to innovate by reducing the career risk of innovative projects. While the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition, the career-concern one allows for complementarity. Our finding that the effect of institutional investors on innovation increases with product market competition supports the career- concern model. This model is also supported by our finding that that CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher.

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mimeo Harvard