Institutional investor distraction and innovation

Abstract

Prior studies suggest high institutional ownership provides stable funding for firm managers supporting long-term innovation. However, we hypothesize that the level of holdings can also proxy for institutional attention. We address this question and find that institutional distraction negatively impacts board monitoring and advisory support for management, reducing R&D, patent filings, citations and creativity.Distraction is concentrated in (1) firms owned by institutions providing low attention before the shock and (2) industries facing low substitute monitoring through competition. Distraction also affects information flow in firms facing high labour mobility and high peer firm innovation (technology spillovers).

Celebrity CEOs, digital transformation and firm performance in China: the moderating role of controlling shareholders and institutional investors

“…However, controlling shareholders may indirectly limit the power of CEOs in the management process to curb opportunistic behavior and internal control issues ( Shleifer and Vishny, 1986 ; Jiang and Kim, 2020 ; Lizares, 2022 ), and the asset-stripping behavior of major shareholders may erode the limited resources available for strategic development, thereby suppressing the digital transformation strategy that relies heavily on corporate resources ( Fan and Wong, 2002 ). Simultaneously, under the full supervision of institutional investors, celebrity CEOs’ authority and discretion may weaken ( Aggarwal et al, 2011 ; Kacperczyk et al, 2015 ; Pu et al, 2023 ), which may also inhibit the degree to which digital transformation is promoted.…”

“…Compared with other small shareholders and retail investors, institutional investors possess strong professional capabilities and industry backgrounds, significant information and resource advantages, and typically hold higher ownership stakes ( Kahn and Winton, 1998 ). They not only intend to participate in overseeing management’s operational decisions but also can effectively intervene in the firm’s major strategies ( Pound, 1988 ; Smith and Watts, 1992 ; Pu et al, 2023 ). Information asymmetry in the principal-agent relationship is the main source of monitoring costs for the firm, and institutional investors, often holding a higher proportion of shares, find the transaction costs associated with frequent buying or selling in the capital market are much higher than monitoring costs.…”

“…Institutional investors can participate in shareholder meetings as shareholders, elect board members and management, and participate directly in major personnel, finance, and strategy decisions ( Fan et al, 2023 ). They can also exert external pressure on the firm’s management through capital market operations, exerting a “signaling” effect, effectively curbing the manager’s self-interest behavior, and causing management, represented by the CEO, to be more cautious in selecting the firm’s strategic activities ( Aggarwal et al, 2011 ; Kacperczyk et al, 2015 ; Pu et al, 2023 ). Under the full supervision of institutional investors, celebrity CEOs have weakened their personal authority and discretionary power, making it difficult for them to engage fully in organizational activities that benefit their celebrity status and social standing.…”

Do new CEOs really care about innovation?

“…Therefore, the citation count captures the technical impact and quality of the cited patent. Patent counts and citations have been increasingly used as indicators of innovation in the finance and economics literature (Brav et al, 2018; Deng et al, 2021; Kim & Valentine, 2021; Li et al, 2021; Pu et al, 2022). However, patent‐based innovation proxies also suffer from issues such as international and industry differences in patenting behaviours, patenting differences between large and small firms, and lack of patenting for secrecy (Hagedoorn & Cloodt, 2003).…”