Do institutional ownership and innovation influence idiosyncratic risk?

Abstract

Business decisions influence the level of idiosyncratic risk. Several factors that contribute to idiosyncratic risk must be explored. Therefore, we examine the impact of innovation and institutional ownership on idiosyncratic risk for NYSE- and NASDAQ-listed firms. The sample contains 30,888 firm-year observations based on annual data from 2003 to 2016. We use a dynamic panel approach to address potential endogeneity difficulties when analyzing the results. Large-scale innovation activity, institutional investors, and innovation reduce idiosyncratic risk. Furthermore, the interactions between institutional investors and high-level ownership stakeholders considerably minimize idiosyncratic risk. Our study demonstrates that the degree to which firms adopt innovation and institutional ownership may affect firm-specific hazards.