Ownership structure, governance, and innovation Raoul Minetti a,n , Pierluigi Murro b , Monica Paiella c a Department of Economics, 486 W. Circle Drive,110 Marshall-Adams Hall, Michigan State University, East Lansing, MI 48824-1038, United States b Lumsa University, Italy c University of Naples Parthenope, Italy article info Article history: Received 19 April 2014 Accepted 24 September 2015 Available online 9 October 2015 JEL classification: G32 G34 O3 Keywords: Ownership Corporate governance Agency problems Technological change abstract This paper tests the impact of firms' ownership structure on innovation in a context featuring pronounced ownership concentration and conflicts between large and minority shareholders. Using data for 20,000 Italian manufacturers, and accounting for the possible endogeneity of ownership levels, we find that ownership concentration negatively affects innovation, especially by reducing R&D effort. Conflicts between large and minority shareholders appear to be a determinant of this effect. Moreover, risk aversion induced by lack of diversification exacerbates large shareholders' reluctance to innovate. Family owners support innovation more than financial institutions, but the benefits of financial institutions increase with their equity stakes. & 2015 Elsevier B.V. All rights reserved. 1. Introduction Technological innovation is a key determinant of firms' performance (OECD, 2010). Innovation allows firms to enhance their productivity, break into domestic and foreign markets, and retain their leadership as market incumbents (Tellis et al., 2009). There is a growing consensus among scholars and policymakers that, in turn, firms' ability to advance their tech- nological frontier is influenced by their governance. Yet, there is little agreement on the way corporate governance exerts this influence. On the one hand, it is sometimes argued that firms with dispersed ownership (relatively common in the United States) have more incentives to engage in innovation because they diversify its risk across a large number of investors (see, e.g., Aghion et al., 2013, for a discussion). Furthermore, in recent years some policymakers have voiced the concern that firms with ownership concentrated in the hands of families (common in continental Europe and East Asia) may be reluctant to reallocate resources from their traditional business to risky new technologies (Onida, 2004). On the other hand, it is also claimed that firms with concentrated, stable ownership can better keep tight control of their activities, monitor their management, and take long-term views, which is essential for investing in new technologies that need time to yield results (The Economist, 2012). These conflicting arguments are often based on anecdotes and case studies while the microeconomic evidence on the link between ownership and innovation remains scant. As we elaborate below, a broad body of studies document that ownership structure affects firms' growth and profitability but do not ascertain the role of innovation in this link. The Contents lists available at ScienceDirect journal homepage: www.elsevier.com/locate/eer European Economic Review http://dx.doi.org/10.1016/j.euroecorev.2015.09.007 0014-2921/& 2015 Elsevier B.V. All rights reserved. n Corresponding author. E-mail address: minetti@msu.edu (R. Minetti). European Economic Review 80 (2015) 165–193