The Influence of on Institutional R & D Behavior Investors Myopic Investment

Abstract

This paper examines whether institutional investors create or reduce incentives for corporate managers to reduce investment in R&D to meet short-term earnings goals. Many critics argue that the frequent trading and short-term focus of institutional investors encourages managers to engage in such myopic investment behavior. Others argue that the large stockholdings and sophistication of institutions allow managers to focus on long-term value rather than on short-term earnings. I examine these competing views by testing whether institutional owenership affects R&D spending for firms that could reverse a decline in earnings with a reduction in R&D. The results indicate that managers are less likely to cut R&D to reverse and earnings decline when institutional owenership is high, implying that institutions are sophisticated investors who typically serve a monitoring role in reducing pressures for myopic behavior. However, I find that a large proportion of ownership by institutions that have high portfolio turnover and engage in momentum trading significantly increase the probabiliyt htat managers reduce R&D to reverse an earnings decline. These results indicate that high trunover and momentum trading by institutional investors encourages myopic investment behavior when such institutional investors have extermely high levels of overnership in a firm; otherwise, institutional ownership serves to reduce pressures on managers for myopic investment behavior.