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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.