Summary:This paper examines the correlation
between innovation (measured as cited-weighted patents) and institutional ownership.The authors also study two possibilities for
lack of innovation within firms: career-concern and managerial laziness.Career concern arises because innovation
requires risk.If a project fails the
manager is held responsible and could potentially lose her job.Innovation also requires motivation.A manager that prefers to “live a quiet life”
will not innovate and succumb to the lazy manager problem.The authors ultimately find that a 10%
increase in institutional ownership leads to a seven percent increase in the
probability of obtaining an additional cite-weighted patent, which does prove
to be statistically significant.The
authors also come to the conclusion that the career-concern model of innovation
is most likely to describe the increase in innovation correlated with an
increase in institutional ownership.
Take Away:Innovation is risky and failures, when
attempting to innovate, should not be punished.Instead owners should encourage their managers to innovate and take an
active role in observing and evaluating their manager’s abilities outside of
success or failure in previous innovation efforts.
