How institutional investment affects innovation

A new study suggests that the effect of institutional investors on innovation in public companies is positive.

In recent decades, institutional investors have made up an increasing percentage of stock ownership  in U.S. markets. Is that good or bad for innovation? A new working paper suggests that the effect of institutional investment on innovation in public companies is positive — with a greater percentage of institutional investment associated with higher R&D productivity, measured in terms of patents and their significance. (Institutional investment also had a small positive effect on overall R&D spending.)

Researchers Philippe Aghion, Luigi Zingales and John Van Reenen  found support for a hypothesis that institutional investors reduce the career risks that executives at public companies undertake in innovation – because the institutional investors can monitor an executive’s performance in a more sophisticated way than the stock market as a whole can. In addition to their findings on R&D productivity, the researchers found that CEOs at companies with greater institutional ownership were less likely to be fired if the company reported poor financial results.