Common Ownership and the Market for Technology (Submitted)
Using information on U.S. patent reassignments, this paper establishes economically and statistically significant effects of common institutional ownership on the reallocation of technological knowledge between publicly traded companies. The effect is strongest for technologies associated with recent innovations. Higher common ownership with providers leads to more innovations and higher market capitalization growth by adopters. A new identification strategy based on pure-indexer ownership establishes causality. The observed effects are consistent with a matching model in which common owners mitigate moral hazard linked to know-how transmission, increasing transfer quality. The results shed light on the impact of common ownership on managerial decision-making.
Institutional investors' ownership in public firms has become increasingly concentrated in the last decades. We study the heterogeneous effects of large versus more dispersed institutional owners on firms' innovation strategies and their innovation output. We find that large institutional investors induce managers to increase spending in internal R&D by reducing short-term pressure. However, to avoid empire building and dilution, large institutional investors prevent acquisitions, which reduces firms' investment in external innovation. The overall effect on firms' future patents and citations is negative. By acquiring less innovation from external sources, firms reduce the returns of their investment in internal R&D, jeopardizing their total innovation output. We use the mergers of financial institutions as exogenous shocks on firms' institutional ownership concentration. Our findings complement the previously found positive effects of institutional ownership on firm innovation and indicate that the effects become negative when institutional investors become large owners.