Institutional Investors, Corporate Innovation, and Information

Abstract

This thesis contains three stand-alone studies that relate to institutional investors, corporate innovation, and information.

The first study examines the role of foreign institutional investors in promoting firm-level innovation around the world. The baseline results show a positive effect of foreign institutional ownership on innovation. Using a difference-in-differences approach that relies on plausibly exogenous variation in foreign institutional ownership created by a quasi-natural experiment, as well as an instrumental variable approach, this study shows that the effect is causal. Three channels through which foreign institutions spur innovation are proposed. The results show that foreign institutions promote innovation by providing active monitoring, by providing insurance for firm managers with career or reputation concerns against the risk of innovation failures, and by facilitating technology transfers from high-innovation countries. This study provides new insights into the real effects of foreign institutions on technological innovation.

The second study examines how the heterogeneity of institutional investors is related to information asymmetry. Using two widely used proxies for information asymmetry, this study finds that heterogeneity has a significant effect on information asymmetry that is robust to the use of firm controls, firm fixed effects, and different estimation methods. Specifically, investment horizon, ownership concentration, and type of institutional investors, as well as the number of institutional investors are significantly related to information asymmetry. This study highlights the role of the heterogeneity of institutional investors in shaping a firm's information environment.

The third study examines the roles of institutional investors in explaining the empirical controversy over the pricing effect of information risk arising from information asymmetry between informed and uninformed traders. Based on both the portfolio approach and the Fama-MacBeth regression, this study finds that although there is a pricing effect of information asymmetry, this relationship exists only among the stocks with low levels of institutional ownership. There is no such an effect for stocks with high institutional ownership levels, suggesting that investors do not require compensation for information risk to hold these stocks.