The Relationship Between Institutional Ownership and Corporate Innovation: A Meta-Analysis

Abstract

Institutional investors have become the largest ownership group of public equity in the US and worldwide. Despite the relevance of institutional ownership for corporate innovation and the vast literature on this relationship, the dominant theoretical frameworks provide conflicting predictions about this relationship. Empirical studies of the relationship between institutional ownership and corporate innovation have also found conflicting results. Beyond conflicting empirical results, the failure of empirical studies to inform the theoretical frameworks on this crucial relationship has impeded the progress of this literature. This paper proposes a process model of the relationship between institutional ownership and corporate innovation that differentiates between innovation inputs and innovation outputs and tests direct, indirect, and total effects using a meta-analytic mediated model. Grounded in the agency theory of free cash flow perspective and incorporating developments on portfolio effects from cognitive limitations, our model sheds light on how distinct groups of institutional owners monitor the corporate innovation process. Our conceptual model and empirical results have important implications for theory, managerial practice, and policy.