Institutional Ownership and the Nature of Corporate Innovation

This paper analyzes whether institutional ownership affects the nature of corporate innovation. We consider the heterogeneity of firm innovation by differentiating upstream research from downstream development using novel indicators for scientific publications and patents. Our analysis shows that institutional owners have a negative impact on upstream research, whereas there is no effect on downstream development. 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.