The Effect of Institutional Ownership Types on Innovation and Competition

Abstract

In corporate innovation, the type of institutional ownership matters. Using exogenous shocks from mergers of financial institutions, we identify two countervailing effects of common ownership on corporate innovation. Higher common ownership by focused, long-term dedicated institutional investors promotes innovation output and impact, as measured by number of patents and non-self citations. Meanwhile, higher common ownership by diversified, short-term transient investors discourages these. Moreover, the effects of common ownership by diversified, long-term quasi-indexing institutions on innovation vary with industry competitiveness. Evidence suggests that common ownership affects innovation through the channels of firm valuation and financing constraint. These results contribute to an ongoing debate on the effects of common institutional ownership on competition.