A Study on the Role of Institutional Investors in the Process of Corporate Innovation Activities

This study examines whether institutional investors have a significant influence on the process of corporate innovation activities. The process of corporate innovation activities can be classified into research and development activities. Research activities are related to uncertain future earnings rather than development activities and expenditures for research activities are made from a long－term perspectives. Research and development expenditures were respectively used as proxies for the process of corporate innovation activities. The type of institutional investors were classified into foreign and domestic institutional investors. This study used a sample of public companies listed on the Korean Stock Exchange from 2001 to 2014. This study’s main result indicates that foreign institutional investors have a significant positive impact on research expenditures but not on development expenditures. Domestic institutional investors were found to have no significant impact on either research or development expenditures. Foreign institutional investors significantly impact research expenditures in the two－stage instrumental variable approach to address endogeneity factors in foreign institutional ownership. These results suggest that corporate innovation activities may vary depending on the type of institutional investors and that foreign institutional investors take a long－term perspective and increase the corporate innovation activities such as research activities. Empirical findings of this study will provide practical implications for policies that regulate institutional investors who may not monitor managers to under－invest corporate innovation activities and encourage corporate innovation activities.