Common Ownership along the Supply Chain and Supplier Innovations

Abstract

Common owners are the (institutional) investors that hold equities of multiple firms. This paper examines the impact of common ownership of suppliers and customers on suppliers' innovation activities. I find suppliers' investment in innovation, quantity and quality of innovation output increase when common owners control higher fractions of them and their customers. The impact of vertical common ownership on innovation input and quality of innovation output is stronger and more robust than that of horizontal common ownership. I provide plausible evidence for causality using a difference-in-differences approach based on a quasi-natural experiment in the form of financial institution mergers and acquisitions. Moreover, I test the potential channels through which vertical common ownership could influence supplier innovation. My evidence suggests that common ownership increases investment in innovation by mitigating hold-up issues between suppliers and customers, and enhances innovation output performance by improving technological spillovers between suppliers and customers. Overall, my evidence suggests that common institutional ownership enhances suppliers' innovation performance by improving relationships between suppliers and their customers.