Common Institutional Ownership and Diffusion of Innovation

Can institutional ownership act as a vehicle for the diffusion of innovation? We take this question to the data, using information on institutional ownership and patent citations over the period 1980-2010. Higher common institutional ownership is associated with a higher intensity of patent citations among firms. To address the potential omitted variables and selection problems, we resort to a difference-in-differences, regression discontinuity analysis around the entry of a stock in the Russell 1000 and 2000 indexes. As the composition of the firm’s institutional owners changes around the index entry, firms joining the Russell 1000 (2000) index receive more citations from Russell 1000 (2000) firms, and fewer from Russell 2000 (1000) firms. Our results suggest a role for institutional investors beyond the mere provision of financing, and indicate that common institutional ownership can have benefits, facilitating the spread of innovation.