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There is much debate about the effect of institutional investors on firm innovation. This paper tests three competing hypotheses by including differences among institutions in their ability to influence firms. Results using an outcome‐based measure of innovation indicate that institutions do not foster short‐term orientation; instead they may influence firms to increase innovation.

This study examines the relationship between corporate strategy and capital structure, specifically the diversfication and financing strategies of a firm. The results show that equity financing is preferred for related diversification and unrelated diversification is associated with debt financing. Additionally, firms diversifying through acquisitions are more likely to use public sources of financing and those emphasizing internal development of new businesses depend primarily on private sources of financing. Using simultaneous equation estimation, we found a reciprocal relationship between a firm's financial strategy and its corporate diversification strategy. Mode and nature of diversification are also reciprocally interrelated. © 1998 John Wiley & Sons, Ltd.