Effects of institutional investor ownership on innovation

This study examines the effects of institutional investor ownership (IIO) on innovation. First, we investigate whether IIO influences firm innovation. Second, we examine whether the stage of economic development influences the effects of IIO on innovation. Then we further investigate the role of IIO type and country level governance and legal framework on the relationship between the IIO and innovation in OECD and emerging economies. Using panel data of firms listed on the NYSE/NASDAQ, we find that the institutional investors significantly increase firm innovation. Our results further show that country-level governance and legal system interact with institutional ownership and affect corporate innovation. We find that country-level governance and legal system are the important institutional features that affect the relationship between institutional ownership and innovation. Furthermore, IIO in developed economies with common law traditions affects innovation positively and civil law traditions work well for developing economies.