Common Ownership and the Market for Technology (Job Market Paper)
I theoretically and empirically study the effect of institutional investors' common ownership on technology transfer between publicly traded companies. In my theoretical model, a technology provider can sell a technology to potential buyers. A technology transfer consists of trading patents and the transmission of unverifiable know-how. Common owners maximize their portfolio value and, thus, incentivize firms' managers to internalize other firms' profits. I show that common ownership alleviates the moral hazard problem of know-how transmission. Hence, common ownership between the technology provider and a particular firm positively affects the probability of transferring the technology to this firm. In my empirical analysis, I use USPTO patent reassignment data, and I provide evidence for this positive effect of common ownership. Notably, the impact of common ownership on the adopter selection is stronger for deals that involve more complex technologies, for which the transmission of know-how is likely to be essential. I apply different matching techniques and an instrumental variable strategy based on the trading partners' pairwise stock market index membership to account for potential endogeneity. My results suggest that the alleviation of moral hazard in know-how transfer is a plausible mechanism through which common ownership facilitates technology transfer and, therefore, affects the reallocation of innovative knowledge.
Institutional investors vary greatly in their involvement in firm decisions. Whereas some institutional investors have incentives to actively monitor and influence firms in a firm-specific manner, others greatly rely on standard measures or the uniform recommendations of proxy advisors like the ISS. We study the heterogeneous effects of different institutional owners on firms' innovation strategy and outcomes. We find that institutional investors with monitoring incentives lead firms to acquire innovation from external sources, whereas blockholder (i.e. non-motivated) investors induce firms to invest in innovation mostly by developing their internal R&D. Both motivated owners and blockholders have a positive effect on patent and citation outcomes, but the effect of motivated investors is 2.5 times larger than that of blockholders. The mechanisms behind these effects are different. Whereas motivated investors encourage innovation because they reduce managerial career concerns, blockholders do so by improving firms' corporate governance. These results shed light on the importance of active monitor funds to help firms achieve value-maximizing outcomes.