Discussion of Innovation and Institutional Ownership Aghion, Van Reenen and Zingales ASSA/AEA Annual Meeting 2008 New Orleans, Mark Sanders Utrecht School of Economics Max Planck Institute of Economics

Summary Model(s): Career Concerns vs. Lazy Managers Career Concerns: -Innovative projects are risky and outcomes are not perfectly correlated with ability. -This makes managers risk averse. -Large (institutional) investors invest more in monitoring and reduce the information asymmetry. -Making managers more innovative. -Particularly so in competitive markets where the outside option is bad and probabilities of high returns are low. -Competition and Monitoring are complements. Lazy Managers: -Managers dislike extra effort on innovative projects. -Investor monitoring motivates him/her. -Less so in competitive markets as less monitoring is needed. -More monitoring makes managers more innovative. -Competition and Monitoring are substitutes.

Summary Data: Authors collect US publicly traded (large > 100m ) firms alive in 1989: -Patents (citation weighted) -Ownership (% institutional) firms observations. Results: For this sample the authors find: -Firms with larger share of institutional ownership have higher levels of citations weighted patents for a given level of R&D (Robust). -This effect is stronger when concentration index in industry is higher (Less Robust).

Summary And the authors conclude that evidence is consistent with their model of career concerns. A well balanced, well written, well documented paper that addresses an important issue: How do individuals respond to their institutional environment when it comes to innovative (entrepreneurial) behavior? The rules of the game determine how entrepreneurial talent is allocated (Baumol (1990)). Also at the micro level, that is within firms.

Discussion The predictions follow from assumptions… …but what does the model assume? -Information on ability (θ) is hidden from both manager and investor. So this is symmetric ignorance. -I would say the manager knows or at least learns faster about his/her ability than investor/owner. -Information on innovation decision (i) is hidden only from the investor, and this is the only information asymmetry. -I would say that is about the only verifiable information in the model. In fact you yourself measure/proxy it in section 3 as patents. -Management skills are sector specific and non-correlated. -I would say that the management of innovative projects is not sector specific. Ability to pull-off an innovation-management job in steel production is highly correlated with ability to do so in food. At any rate that assumption has testable implications on mobility and wage differentials and a literature exists.

Discussion Some Remarks on Data and Results: You use patents as innovative behavior. Patenting is an intermediate (measurable) output. The ultimate output is the income/efficiency of the firm. Would some link to a TFP-growth measure not be better? You focus on institutional but measure ownership concentration. It is not the type of owner but the incentive he has to monitor the manager that matters. That incentive depends in your model on ψ, the share of ownership. You impose a linear (symmetric) impact of ownership. I would suspect the relationship is non-linear (S-shaped) and non- symmetric (up not same effect as –down). Could you test for that?