Do institutional investors still encourage patent-based innovation after the tech bubble period?

Abstract

This paper reexamines the effect of institutional ownership on corporate patent-based innovation. Using an updated sample, we confirm that higher institutional ownership leads to more innovations, including more citations received by patents of a firm, and higher patent generality and originality. However, we find that the impact of institutional ownership on patent-based innovation greatly decreases after the tech bubble bursts and this lower support is driven by both transient and non-transient institutional investors. We do not find that institutional investors intentionally lower their support of patent-based innovation for improving this less efficient innovation. Our results support the contention that the exorbitant litigation cost of patents lowers the incentives for institutional investors to invest in patent-based innovation after 2000.