Institutional Ownership and Firm Innovation - A Swedish Study on the Impact of Institutional Ownership on R&D Activity

Abstract: Purpose: The objective of this study is to investigate the relationship between institutional ownership and firm innovation in a Swedish and contemporary context. Theoretical framework: The theoretical framework underlying this study is primarily based on the myopic institutions theory, which suggests that institutional investors have an inherent short-term focus that influences their attitude towards long-term investments such as R&D. Methodology: This study employs multiple ordinary least squares (OLS) regressions to investigate the relationship between institutional ownership and firm innovation, measured by the proxy variable R&D-to-assets. Empirical foundation: The complete data sample consists of 1059 firm observations from the Swedish stock index OMXSPI, covering the period from 2012 to 2021. Conclusions: The result of this study shows that institutional ownership has a statistically significant negative impact on firm innovation. This finding aligns with anecdotal evidence and the myopic institutions theory, which suggests that institutional investors prioritize short-term gains over long- term value creation. An additional model exploring the interaction between institutional ownership and firm size confirms the negative effects of both variables on R&D. However, surprisingly, the joint effect of institutional ownership and size amplifies resource allocation towards R&D.