Does institutional ownership discourage investment in corporate R&D?

Abstract

We examine the influence of institutional investor ownership in a firm on their investment in R&D. We find partial support for managerial myopia in that at a higher level of institutional ownership, we find managers cut back R&D investment. We find a positive relation between institutional holdings in a firm and their investment in R&D till the institutional holdings in the firm reaches a threshold. Our results are consistent with the notion that managerial myopia sets in as the managers yield to institutional pressure when the institutional ownership level exceeds a threshold. Our results suggest that managers become sensitive to the pressure from institutional investors when the institutional ownership crosses a threshold.We find the greater the stock undervaluation, the lower the investment in R&D. We find stronger negative relation between institutional ownership and R&D when the firm's stock is more undervalued, consistent with the notion that managerial myopia worsens when the firm is more likely to be a takeover target as their stock becomes undervalued. We find banks, insurance companies, and public pension funds have a positive influence on the firm's R&D, but mutual funds and hedge funds have a negative influence on R&D. We find positive influence of dedicated institutional investors but negative influence of transient investors and quasi-indexers on corporate R&D.