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How Do Foreign Institutional Investors Enhance Firm Innovation?

Published online by Cambridge University Press:  25 July 2017

Hoang Luong ,
Fariborz Moshirian ,
Lily Nguyen ,
Xuan Tian  and
Bohui Zhang
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Abstract

We examine the effect of foreign institutional investors on firm innovation. Using firm-level data across 26 non-U.S. economies between 2000 and 2010, we show that foreign institutional ownership has a positive, causal effect on firm innovation. We further explore three possible underlying mechanisms through which foreign institutions affect firm innovation: Foreign institutions act as active monitors, provide insurance for firm managers against innovation failures, and promote knowledge spillovers from high-innovation economies. Our article sheds new light on the real effects of foreign institutions on firm innovation.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 4 , August 2017 , pp. 1449 - 1490
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank Jarrad Harford (the editor) and Sara Holland (the referee) for their valuable comments and suggestions that have helped improve our article significantly. We are grateful for constructive comments from Rachita Gullapalli, Marco Pagano, Terry Walter, and participants at the 2015 Financial Management Association Annual Meeting, the 2014 Entrepreneurial Finance and Innovation Conference, and the 2013 Financial Integrity Research Network Research Topic Group Meeting in Corporate Finance. Tian acknowledges financial support from Tsinghua University Research Grant (Project No. 20151080451). All errors remain our own.

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