Innovation, institutional ownerships and board diversity

This work investigates the relationships between institutional ownership, board diversity, and corporate innovation in US-listed firms. Institutional investors play a crucial role in a firm's operation and exert considerable influence on the efficient monitoring of innovative investment. Theory predicts that institutional ownership has a positive effect on innovation investment. However, we find that active institutional investors drove this positive relationship. For those passive institutional investors, this impact is negative. However, a banker on the board can change the effect from negative to positive for passive institutional investors. Firms with female directors, a high presence of audit committee, or a large proportion of ethnic minority directors on board have a significant and positive impact on innovation, including R&D investments and the number of patents. The enactment of Sarbanes-Oxley Act (SOX) in 2002 made information more transparent to investors and narrowed the gap between active and passive institutional investors on innovation. The findings are robust to addressing endogeneity concerns and causal relationships using the IV-2SLS, Difference-in-Differences approaches, and alternative methodology.