Institutional Investors and Corporate Decision-Making: An investigation of the relationship between institutional ownership and R&D investments

Abstract: In this paper we investigate the impact of institutional ownership on long-term corporate decision-making by analysing the relationship between institutional investment horizon and research and development (R&D) investments. Some critics argue that institutional investors put pressure on corporate boards to meet short-term objectives and therefore contribute to managerial myopia and obstruct long-term investments, which could be crucial for sustainable value creation. In contrast, other research supports the idea that institutional investors can be characterized by long-term sophistication and that they take a monitoring role as large shareholders to ensure managerial long-term orientation. We conduct a quantitative study and examine these competing perspectives by differentiating institutional investors by their investment horizons and by using R&D as a proxy for long-term investment decisions. This is tested using a method of multivariate ordinary least squares (OLS) to estimate R&D investments in a linear regression model. Our results indicate a positive relationship between institutional investment horizon and R&D investments, which implies that short-term oriented institutional investors increase managerial myopia while long-term oriented institutional investors support long-term decisions through monitoring. Moreover, we find support for a positive relationship between institutional ownership concentration and R&D investments.