Institutional Ownership and the Nature of Corporate Innovation

This paper analyzes whether institutional ownership affects the rate and nature of corporate innovation. We explicitly consider the heterogeneity of firm innovation by differentiating upstream scientific research from downstream development using novel scientific publication and patent indicators. Our analysis shows that greater presence of institutional owners has a negative impact on long-term oriented scientific research, whereas there is no effect on downstream inventions. Consistent with a short-term orientation of institutional owners, we further show that scientific research is associated with lower short-term operating performance but higher long-term firm value. These findings support the view that capital markets in general, and institutional owners in particular, can induce myopic firm behavior.