Innovation and Institutional Ownership

Does greater equity ownership by institutional investors improve or inhibit innovation incentives? We present a model of career concerns where institutional ownership increases the incentives managers have to innovate through reducing informational asymmetries. We then utilize an original panel of US firms containing information on ownership, governance, managerial characteristics and innovation. We show that higher instiutional ownership is positively associated with greater innovation, even after controling for fixed effects and endogeneity using membership of the S&P500 as an instrumental variable. An alternative to our career concern model is that institutions reduce managerial slack (the “lazy manager” story). We show that the positive effect of insitutional ownership is stronger when competition is more intense which is inconsistent with the lazy manager story, but consistent with our career concerns model. JEL No. O31, O32, O33, G20, G32