Do diversified institutional investors spur the transfer of innovative technologies among portfolio firms? A two-sided matching model shows that common ownership enhances technology transfers and influences intellectual property allocation, only if transfers of uncodified know-how are not contractible. Using U.S. patent reassignments, the findings reveal significant effects of common institutional ownership on technology reallocation, especially if uncodified know-how is crucial for technology adoption. Higher common ownership with providers predicts increased innovation output and market capitalization growth of adopters. A new identification strategy using pure-indexer ownership establishes causality. The results highlight the role of common owners' attention in shaping managerial decisions.
Does increasing common ownership influence firms' automation strategies? We develop and empirically test a theory indicating that institutional investors' common ownership drives firms that employ workers in the same local labor markets to boost automation-related innovation. First, we present a model integrating task-based production and common ownership, demonstrating that greater ownership overlap drives firms to internalize the impact of their automation decisions on the wage bills of local labor market competitors, leading to more automation and reduced employment. Second, we empirically validate the model's predictions. Based on patent texts, the geographic distribution of firms' labor forces at the establishment level, and exogenous increases in common ownership due to institutional investor mergers, we analyze the effects of rising common ownership on automation innovation within and across labor markets. Our findings reveal that firms experiencing a positive shock to common ownership with labor market rivals exhibit increased automation and decreased employment growth. Conversely, similar ownership shocks do not affect automation innovation if firms do not share local labor markets.
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.
Can institutional shareholders shape the strategic decisions of top managers in their portfolio companies by leveraging CEOs' social connections? This paper reveals that firms with significant common ownership with a competitor are more likely to hire CEOs who have pre-existing social ties with the rival firm's chief executive. Such connections, established during the hiring process, correlate with enhanced performance metrics like return on assets and overall firm value for rivals. Additionally, this strategy decreases product similarity between the hiring firm and its competitors and boosts rivals' stock market returns during the hiring events of connected CEOs. Our findings are more pronounced among closer competitors. By analyzing the effects of exogenous changes in common ownership due to mergers among institutional investors, we discover that the presence of an additional common blockholder with a competitor doubles the likelihood that a firm will appoint a CEO with ties to the competitor’s chief executive.