Institutional Ownership and Corporate Scientific Research
Abstract
This paper studies the relation between institutional ownership and corporate scientific research. This topic is of interest because scientific research is crucial for firm- and national-level competitiveness, and institutional investors are among the most important financial market participants. Using a comprehensive sample of 2,618 U.S. firms over the period from 1991 to 2014, we find that greater institutional ownership is associated with reductions in scientific research. We discuss several possible mechanisms that could contribute to this finding: a large proportion of institutional investors with high portfolio turnover, an increase in the sensitivity of managerial compensation to stock prices, and more intensive board monitoring. We use an instrumental variable approach that exploits variation in Russell index membership and shocks to unrelated parts of institutional investors’ portfolios to ensure that our findings do not simply arise from endogenous selection. Finally, we find that a decrease in scientific research contributes to an increase in short-term earnings, but this comes at the expense of long-run firm value. Our findings challenge the view that institutional investor monitoring promotes long-term investments in intangible assets.
