Ownership Structure, Governance and Innovation: Evidence from Italy

This paper tests the impact of firms' ownership structure on firms' innovation decisions using a rich dataset of roughly 20,000 Italian manufacturers. We find that ownership concentration negatively affects the probability of innovation, especially by reducing firms' R&D effort. The results also suggest that risk aversion induced by lack of (financial or industrial) diversification is a source of large shareholders' reluctance to innovate. Moreover, conflicts of interest between large and minority shareholders appear to reinforce the negative effect of ownership concentration on innovation. Once we distinguish across types of shareholders, we uncover some evidence that families support innovation more than financial institutions, but that the benefits of financial institutions for technological change increase when they hold larger equity stakes. Collectively, the findings support the view of recent literature that the agency problems that affect continental Europe markedly differ from those in the United States, not only in static but also in technologically dynamic environments.