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On the Governance of Innovation: Institutional Ownership vs. Stock Price

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.
Date24 January 2015
CreatorsLe, Huong Thi Thu
ContributorsLin, Ji-Chai, Narayanan, Rajesh, Song, Wei-Ling, Rho, Seunghwa, McCarter, Kevin
Source SetsLouisiana State University
Detected LanguageEnglish
Rightsunrestricted, I hereby certify that, if appropriate, I have obtained and attached herein a written permission statement from the owner(s) of each third party copyrighted matter to be included in my thesis, dissertation, or project report, allowing distribution as specified below. I certify that the version I submitted is the same as that approved by my advisory committee. I hereby grant to LSU or its agents the non-exclusive license to archive and make accessible, under the conditions specified below and in appropriate University policies, my thesis, dissertation, or project report in whole or in part in all forms of media, now or hereafter known. I retain all other ownership rights to the copyright of the thesis, dissertation or project report. I also retain the right to use in future works (such as articles or books) all or part of this thesis, dissertation, or project report.

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