The Real Effects of Local Investors: Evidence From Corporate Innovation

Abstract

This paper investigates whether the proximity between mutual funds and their investments could explain corporate innovation. I find that mutual funds investing in local firms increase firms’ R&D expenditure and productivity. More importantly, firms with greater local ownership produce more patents and patents with bigger impact. My identification strategies suggest this relation is causal. The effects of local investors on corporate innovation are more pronounced for firms with low information quality, poor corporate governance, and higher competition. The results suggest that local investors are effective monitors with information advantages that enhance corporate innovations.