Innovation and Institutional Investment


Aghion P, Reenen VJ, Zingales L. Innovation and Institutional Investment. 2009.


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.


mimeo Harvard

Last updated on 12/04/2012