Common Institutional Ownership, Hold-up Problems, and Supply Chain Innovation

Abstract

We show that common institutional ownership (CIO) along the supply chain can mitigate hold-up problems faced by bilateral relationships resulting from incomplete contracts. Suppliers conduct more relationship-specific innovative activities when CIO networks are wider and deeper. We establish causality through exploiting exogenous shocks to CIO from a broad sample of mergers between financial institutions. Consistent with hold-up theories, the CIO effects on innovation specificity are stronger for suppliers faced with more severe hold-up issues. We further provide supporting evidence that knowledge spillovers is unlikely to be the main channel. Our work sheds new light on the real effect of CIO on corporate innovation along the supply chain.