Exit as governance: do blockholders affect corporate innovation in large US firms?

Abstract

Using a sample of large US firms, this study shows that blockholders in combination with liquidity can contribute positively to innovation (R&D investments). We contribute to the literature on managerial myopia that has focused mainly on large owners and their type (short-term/long-term). Our results are in line with recent theoretical studies arguing that blockholders in combination with market liquidity can mitigate managerial myopia, as suggested by the exit model of governance. The results indicate that blockholders can be efficient in resolving agency problems and that they can enhance long-term prosperity, even when the individual blockholder investment horizon may not be long.

Liquidity and Corporate Governance

“…In support of this conclusion, Norli et al (2015) show that higher liquidity of a firm's shares significantly increases the likelihood that the firm will be subject to shareholder activism in a sample of US firms during 1994-2007. Helling et al (2019) show that the impact of large institutional owners on R&D investments is higher in US firms with more liquid shares. John et al (2019), analyzing the consequences of a reform that substantially increased the liquidity of some shares in the Chinese stock market, conclude that large shareholders responded by improving corporate governance of their firms rather than selling off their shares.…”

Does science–industry cooperation policy enhance corporate innovation: Evidence from Chinese listed firms

“…We measure corporate innovation by using R&D expenditures as input, and minimise sample selection bias by replacing R&D expenditures with a value of zero if missing (Hirshleifer et al ., 2012). Paralleling the latest studies (Xie et al ., 2020; Helling et al ., 2020; Zhang et al ., 2020), we construct two indicators based on R&D expenditure data: the ratio of R&D expenditures to total assets ( RD_Assets ) and the ratio of R&D expenditures to revenue ( RD_Sales ). We also measure corporate innovation by the number of patent applications and construct three indicators: Patent , defined by the natural logarithm of 1 plus the total number of all patent applications; Patenti , defined by the natural logarithm of 1 plus the total number of invention patent applications; and Patentud , defined by the natural logarithm of 1 plus the total number of non‐invention patent applications, such as utility and design patent applications.…”

Financial reporting and corporate innovation: a review of the international literature

“…Institutional owners are expected to curtail myopic managerial behaviour with respect to R&D investments (Kim et al, 2019;Helling et al, 2020;Mathers et al, 2020). For example, Kim et al (2019) document that innovation outputs significantly increase with the presence of institutional investors with long-term investment horizons, since they tend to mitigate the problem of managerial short-termism by engaging in better monitoring activities and alleviating managerial career concerns.…”

“…Unlike controlling shareholders, who affect corporate policies mainly through intervention, small blockholders often have insufficient ownership interest in the company to intervene in its operations directly but may, instead, affect corporate policies through the threat of exit. Using a sample of S&P 500 firms in the US, Helling et al (2020) find that both small and large blockholders can contribute positively to innovation through the threat of exit. Since blockholders have more incentives to acquire additional private information from the firm with enhanced market liquidity, and trade upon it in larger blocks or volumes, managers are expected to engage in long-term innovative activities to encourage large equity owners to retain their stake.…”