The effect of institutional blockholders' short-termism on firm innovation: Evidence from the Korean market

Abstract

This study examines how the behavior of institutional blockholders affects investment in research and development (R&D) in Korean firms. Contrary to the monitoring view that institutional investors promote firms' R&D, the results of this study indicate that institutional blockholders have a significantly negative influence on R&D investment. More importantly, when we decompose institutional blockholdings according to institutions' national origins and investment horizons, we find that firms with higher foreign short-term blockholdings spend significantly less on R&D than other firms do. These results show that when the local characteristics of the Korean market (i.e., a predominance of owner-manager firms and weak corporate governance) prevail, institutional monitoring is not effective, and, thus, institutional blockholders tend to focus on the short term. Overall, in the Korean market, stronger short-termism hinders institutional monitoring and negatively affects firms' R&D investments. © 2019 Elsevier B.V.