Institutional investors and medical innovation

Abstract

In this research paper, we investigate if institutional investors influence corporate innovation in the US pharmaceutical industry. We hand collect unique datasets from the Food and Drug Administration (FDA), including drug patents, drug approvals, medical device approvals, and Phase I-II-III drugs under clinical testing. We find that higher institutional ownership has a positive, causal effect on firm innovation. We document that institutional ownership increases the number of FDA approved products. Then, we examine the innovation quality and find that institutional ownership reduces the likelihood of both drug recalls and market withdrawals. Our results investigate possible underlying mechanisms through which institutional investors provide faster and more frequent innovation outcomes: Institutional holdings act as active monitors by providing insurance for firm executives against innovation failures. Our article sheds new lights on the real effects of institutional investors on pharmaceutical firms’ innovation.