Abstract
This paper seeks to determine if institutional investors influence corporate research and development (R&D) investment policies by encouraging R&D investment in firms with high information asymmetry. The effect of changes in institutional investor levels to subsequent changes in R&D investment levels are examined using firm and year fixed effect regressions and difference-GMM regressions. Increased institutional ownership leads to increased R&D investment and this relationship is stronger in firms with higher information asymmetry. Institutional investors encourage higher R&D investment primarily in firms with high information asymmetry indicating they have an advantage in discerning the value of R&D investments in such firms. Institutions are an important and increasing force in U.S. stock ownership. The results in this paper indicate that institutional investors have an advantage in discerning the value of R&D investments in firms with high information asymmetry. The presence of institutional investors encourages the management of such firms to make long-term investments in R&D.
Highlights
The amount of investment to make in research and development (R&D) is a key financial decision for many companies
The institutional ownership levels for all firms and for firms that invest in R&D is rather similar
The results indicate that increased institutional investor ownership levels gives rise to an increase in R&D investment
Summary
The amount of investment to make in research and development (R&D) is a key financial decision for many companies. Management may choose to increase short-term earnings by underinvesting in R&D This outcome is made possible because R&D is expensed immediately while its benefits are often not recognized for years. If managers underinvest in R&D, institutional investors may serve to mitigate, exacerbate or have no effect on this problem. Institutional investors such as banks, insurance companies, mutual funds, pension funds, and charitable endowments own nearly 70% of the shares of U.S corporations (Bogle, 2010). If institutional investors encourage R&D investment more in low information asymmetry firms, it indicates that they are not more effective than other investors at monitoring firms which are difficult to monitor. I provide evidence that institutional investors induce R&D investment more effectively in firms with high information asymmetry
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