Institutional Investors, R&D Policy and Firm Stock Liquidity

This paper seeks to determine if institutional investors influence corporate research and development (R&D) investment policies. Specifically, this study tests whether institutional investors encourage R&D investment in firms with higher firm stock liquidity. Firm and year fixed effect regressions examining the effect of changes in institutional investor levels to subsequent changes in R&D investment levels are used. For robustness, difference-GMM regressions and regressions for different time periods are ran on the same relationship. I find that increased institutional ownership leads to increases in R&D investment, especially in firms with higher firm stock liquidity. Results support the assertion that the presence of institutional shareholders encourages management to invest in R&D for long-term benefits in lieu of short-term profits. Institutions have become the foremost power in U.S. stock ownership. The results in this paper indicate that institutional investors can deter management from investing in R&D at a sub-optimal level, thus benefiting all shareholders.