Abstract:

We examine whether the disposition effect of institutional investors influences corporate innovation decisions, as reflected in R&D investment. Using detailed mutual fund equity holdings, we construct a firm-level measure of institutional disposition by aggregating fund-level realization behaviors. We find that a stronger firm-level disposition effect is significantly associated with higher R&D intensity. This increase in R&D leads to higher subsequent stock returns and elevated contemporaneous equity valuations. Mechanism tests reveal that the disposition effect operates by reducing firms’ total and idiosyncratic stock return volatility, thereby lowering the perceived short-term market risk faced by managers when making R&D investment decisions. The positive impact of the disposition effect on R&D is more pronounced in firms with higher institutional ownership and fewer corporate site visits, stronger innovative capabilities, more frequent analyst rating upgrades, and tighter internal cash availability. Our results are robust to alternative mutual funds holding thresholds, and hold when we employ a Bartik-type instrument-variable approach to address potential endogeneity. Overall, the study advances understanding of the real effects of investor behavior by demonstrating that the behavioral biases of institutional investors materially shape corporate innovation policies.

Please choose your submission type: Full Paper

Primary Track: Financial Management

Keywords: Behavioral Finance ;Corporate Finance ;Entrepreneurial Finance ;Financial Decision Making ;Managerial Finance

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Dr. Zerui Sun