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CentrePiece article
In brief: Two cheers for Anglo-Saxon financial markets?
Philippe Aghion, John Van Reenen and Luigi Zingales
May 2012
Paper No' CEPCP372:
Full Paper (pdf)

CentrePiece 17 (1) Spring 2012

JEL Classification: O31; O32; O33; G20; G32

Tags: innovation; institutional ownership; career concerns; r&d; productivity

We find that institutional ownership in publicly traded companies is associated with more innovation (measured by cite-weighted patents). To explore the mechanism through which this link arises, we build a model that nests the lazy-manager hypothesis with career-concerns, where institutional owners increase managerial incentives to innovate by reducing the career risk of risky projects. The data supports the career concerns model. First, whereas the lazy manager hypothesis predicts a substitution effect between institutional ownership and product market competition (and managerial entrenchment generally), the career-concern model allows for complementarity. Empirically, we reject substitution effects. Second, CEOs are less likely to be fired in the face of profit downturns when institutional ownership is higher. Finally, using instrumental variables, policy changes and disaggregating by type of owner we find that the effect of institutions on innovation does not appear to be due to endogenous selection.

This article summarises 'Innovation and Institutional Ownership' by Philippe Aghion, John Van Reenen and Luigi Zingales, Centre for Economic Performance Discussion Paper No. 911, February 2009