## Are Passive Institutional Investors Engaged Monitors or Risk-Averse Owners? Both!

_IMF Working Papers, June 4, 2021_

## Source details

**Canonical URL:** [Are Passive Institutional Investors Engaged Monitors or Risk-Averse Owners? Both!](https://www.imf.org/en/publications/wp/issues/2021/06/04/are-passive-institutional-investors-engaged-monitors-or-risk-averse-owners-both-50228)

## Other formats

- [Markdown version](/en/publications/wp/issues/2021/06/04/are-passive-institutional-investors-engaged-monitors-or-risk-averse-owners-both-50228/index.md)
- [Structured JSON version](/en/publications/wp/issues/2021/06/04/are-passive-institutional-investors-engaged-monitors-or-risk-averse-owners-both-50228/index.json)
- [Bundle manifest](/en/publications/wp/issues/2021/06/04/are-passive-institutional-investors-engaged-monitors-or-risk-averse-owners-both-50228/bundle-manifest.json)

## Bibliographic details
- Authors: Yuanchen Yang
- Published: June 4, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513573496.001

---

### Summary / Key Findings
- Study differentiates effects of passive institutional investors (mainly index funds adopting a passive portfolio strategy) on firms’ innovation activities and innovation strategies.
- With larger passive institutional ownership:
  - Firms’ countable innovation activities increase.
  - Firms shift innovation strategies toward exploitation of existing knowledge instead of exploring new technology.
- Enhanced monitoring by passive institutional investors through active votes could explain the positive effects on firms’ innovation activities.
- Increasing risk aversion on the part of passive institutional investors appears to be the underlying force driving firms’ shift to incremental innovation.
- The paper uncovers a subtle relation between institutional investors and innovation that earlier studies largely ignored.

### Methodology
- Identification strategy relies on plausibly exogenous variation in passive institutional ownership generated by Russell 1000/2000 index reconstitutions.

### Mechanisms and Interpretation
- Enhanced monitoring channel:
  - Passive institutional investors engage via active votes, which may improve observable, countable innovation activities.
- Risk-aversion channel:
  - Passive investors’ increasing risk aversion leads firms to favor incremental (exploitation) innovation over exploratory (new-technology) innovation.

### Implications
- Institutional investor ownership composition affects not only the quantity of firm innovation but also the direction and risk profile of innovation strategies.
- Policymakers and corporate boards should account for how ownership by passive institutional investors may encourage incremental innovation even as it increases measurable innovation activity.

---

## Content in this bundle

- **Working Paper**
  - [Working Paper (Markdown version)](/-/media/files/publications/wp/2021/english/wpiea2021158-print-pdf.pdf.md){rel="alternate" type="text/markdown"}
  - [Working Paper (PDF)](/-/media/files/publications/wp/2021/english/wpiea2021158-print-pdf.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2021/06/04/are-passive-institutional-investors-engaged-monitors-or-risk-averse-owners-both-50228_