Abstract
This work investigates the relationships between institutional ownership, board diversity, and corporate innovation in US-listed firms. Institutional investors play a crucial role in a firm’s operation and exert considerable influence on the efficient monitoring of innovative investment. Theory predicts that institutional ownership has a positive effect on innovation investment. However, we find that active institutional investors drove this positive relationship. For those passive institutional investors, this impact is negative. However, a banker on the board can change the effect from negative to positive for passive institutional investors. Firms with female directors, a high presence of audit committee, or a large proportion of ethnic minority directors on board have a significant and positive impact on innovation, including R&D investments and the number of patents. The enactment of Sarbanes–Oxley Act (SOX) in 2002 made information more transparent to investors and narrowed the gap between active and passive institutional investors on innovation. The findings are robust to addressing endogeneity concerns and causal relationships using the IV-2SLS, Difference-in-Differences approaches, and alternative methodology.
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Notes
We tried to employ a firm’s ESG (environmental, social, and governance) scores as the instrument to instruct institutional ownerships (e.g., Dyck et al. 2019). The results are very significant. However, as very limited firms in our sample period disclose ESG scores, the observations reduce dramatically. To maintain sufficient observations, we remove the ESG instrument.
The IPTECH Patent Database is a comprehensive patent analysis platform with global patent search and analysis tools developed by Taiwan LianYing Technology Co., Ltd. in 2003. This database platform integrates the patent database website of various countries. We double-checked two databases for some uncertainty.
Bushee (1998) and Bushee et al. (2010) provide institutional investor classification data (1981–2013) on the website: http://acct3.wharton.upenn.edu/faculty/bushee/
According to the United States Patent and Trademark Office (USPTO), utility patents issued for “the invention of a new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof, it generally permits its owner to exclude others from making, using, or selling the invention for a period of up to twenty years from the date of patent application filing, subject to the payment of maintenance fees. In recent years, approximately 90% of the patent documents issued by the USPTO were utility patents.” Source: http://www.uspto.gov/web/offices/ac/ido/oeip/taf/patdesc.htm.
We include industry dummy variables (industry fixed effects) instead of firm fixed effects in empirical models because the data shows the opportunities for innovation to differ among industries. However, we do control the firm characteristics in our sample instead of firm fixed effects. This aligns with much of corporate finance literature, where authors use industry-fixed effects in panel data regression.
Similarly, the year effects are designed later in the section when we examine whether the enactment of the SOX Act in 2002 affects the relationship between institutional ownership and firm innovation investment. Accordingly, we employ the multivariate difference-in-differences (DID) analysis with the 5-year window centered on the event year. To make the model specification consistent, we designed it in the DID section in which the pre- and post- event covered all the years. Noticeably, our model is 2SLS than OLS, with some more concerns included.
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This paper was presented at the 26th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management, Rutgers University, USA; American Accounting Association Annual Meeting concurrent section, San Diego, USA; and Vietnam Symposium in Banking and Finance, Hanoi, Vietnam. We appreciate the discussants, participants and two referees for the suggestive comments.
Appendix A: Definition of Variables
Appendix A: Definition of Variables
Variables name | Variable label | Definition | |
|---|---|---|---|
Innovation measures | |||
Innovation input | RD_SALE | The ratio of R&D expenditure to total sales | |
RD_TA | The ratio of R&D expenditure to total assets | ||
Innovation output | LN(1 + PATENTS) | The logarithm of one plus the total number of patents | |
Innovative efficiency | IE | The ratio of patents relative to the R&D capitalization | |
Institutional ownerships | |||
Total institutional ownership | IO_TOTAL | The percentage of shares owned by total institutional investors divided by total shares outstanding | |
Active institutional ownership | IO_ACTIVE | The percentage of shares owned by active institutional investors (investment companies, independent investment advisors, and public pension funds) to total shares outstanding | |
Passive institutional ownership | IO_PASSIVE | The percentage of shares owned by passive institutional investors (banks, insurance companies, private pension fund, and others) to total shares outstanding | |
Board diversity | |||
Female Appointment | FEMALE | Dummy variable, 1 if at least one director is female; 0 otherwise | |
Ethnic diversity | ETHNIC_MINORITY | The proportion of the ethnic minority (African-American, Hispanic, and Asian) on the board | |
Qualification diversity | AUDITING | The proportions of directors who are audit committee members | |
BANKING_COMMIT | Dummy variable, 1 if a firm has at least one banker on board providing professional banking services, 0 otherwise | ||
Gender diversity | GENDER | The proportion of females on the board | |
Board characteristics | |||
Board independence | BOARD_INDEPEND | The proportion of independent directors on the board | |
Board size | BOARD_SIZE | Number of directors serving on the board | |
CEO duality | CEO_DUALITY | Dummy variable, 1 if the CEO also acts as a chairman of the board, 0 otherwise | |
Firm characteristics | |||
Firm size | SIZE | The logarithm of the firm’s book value of total assets | |
Firm profitability | PROFITABILITY | Net income/ Total assets | |
Sales growth rate | GROWTH | (Sales t – Sale t-1)/ Sales t-1 | |
Cash ratio | CASHRATIO | Total cash divided by total assets | |
Firm leverage | LEVERAGE | The book value of the firm’s debt divided by total assets | |
Capital expenditure | CAPEX_TA | Capital expenditure divided by total assets | |
S& P 500 index | SP500_D | SP500_D is set to 1 if the firm is in the S& P 500 index, 0 otherwise | |
Market capitalization | LNMKVALT | The log of the market value of the firm | |
Industry dummies | INDUSTRY_D | Industry dummies, classified by SIC codes | |
Event dummies | SOX2002 | Dummy variable, 1 if the year was after the Sarbanes–Oxley Act in 2002, 0 otherwise | |
Accelerated filers | ACCELERATED_FILER | Dummy variable, 1 if is an accelerated filer to comply the Sarbanes–Oxley Act (firm with a market value of equity higher than US$75 million), 0 otherwise | |
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Phan, TT., Yu, HC. Innovation, institutional ownerships and board diversity. Rev Quant Finan Acc 59, 1647–1693 (2022). https://doi.org/10.1007/s11156-022-01102-7
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DOI: https://doi.org/10.1007/s11156-022-01102-7