The Effect of Institutional Ownership on Innovation: New Evidence

Abstract

We follow Bushee (2001) and classify institutional investors into long-term and short-term investors. We find that that long-term institutional ownership is positively associated with innovative quality. However, we do not find such an association for short-term owners. Our results suggest that long investment horizons give institutional holders incentives to engage in monitoring activities and improve the subsequent performance in innovation. We also find that when firms have less growth potential, more years in operation, or financial constraints, long-term institutional owners are positively associated with innovative quality, suggesting that long-term investors exert a monitoring effort when direct monitoring becomes more important.