The Impact of Institutional Investors on European Listed Companies’ Innovation and Performance

Abstract

The purpose of this thesis is to analyze how the share of institutional investors’ ownership in corporate structures can affect firms’ performance and innovation. I perform this analysis on 528 listed European firms spread across 14 European Union member countries from the period of 2004 to 2019. My main contribution from this study is that I perform an analysis segregating by the type of institutional investor and by applying it to the particular context of European corporate ownership structures.

For performance measure, I use the pre-tax ROA percentage, and for innovation I construct an index using the companies’ patents and its citations to account for not only the quantity but also the quality of innovation.

Consistent with previous literature, I find a significant positive influence from institutional ownership, even after controlling for industry and country. However, not all institutions have the same significance, with hedge funds and insurance companies having a stronger impact than pension funds and banks.

For innovation, I find mixed results. Institutional ownership does not seem to have any impact by itself after the controls, but it does have an impact after controlling for strategic investors’ ownership, a peculiarity of Europe that is not present in the United States. I find that hedge funds and investment advisors usually complement the strategic investors’ negative effect on innovation, whereas insurance companies try to counter-balance it. Moreover, institutional ownership concentration seems to stifle innovation when colluding with strategic concentration but has the opposite effect in performance.