On the Governance of Innovation: Institutional Ownership vs. Stock Price
|Institution:||Louisiana State University|
|Keywords:||Innovation; R&D; Stock Price; Institutional Investor|
|Full text PDF:||http://etd.lsu.edu/docs/available/etd-01192015-102433/|
Firms can change their outstanding shares to manage their stock price levels. Those with lower stock prices tend to attract more speculative trading, which causes higher price volatility and may force their managers to excessively focus on short-term earnings at the expense of R&D and other long-term projects. Thus, I hypothesize that keeping high stock price levels allows firms to (i) limit speculative traders influences on stock prices and thus mitigate investor short-termism, and (ii) enhance R&D productivity. Indeed, I find that high-priced firms are less likely to cut R&D to reverse an earnings decline, less likely to fire their CEOs, and have more innovation. All these findings are robust after controlling for institutional ownership, a factor that has been shown in the literature to have a correlation with share price and also have a significant impact on R&D policies and innovation. For robustness checks, I examine stock splits, which allow mangers to re-set their stock price levels, and IPOs in which managers set an offering price range before shares are publicly traded. Consistent with my hypothesis, I discover that innovative firms are less likely to split their stocks, and that innovation declines after firms split their stocks. Furthermore, IPO firms that set higher offering prices, not those that attract more institutional ownership, have more future innovation. Thus, the results imply that, rather than being forced or assured by institutional investors to innovate as the extant literature suggests, managers of innovative firms actively support high stock price levels to foster innovation.