We examine whether industry peers influence a firm’s innovation output and whether institutional cross-ownership is an important mechanism behind the peer effect.
We address endogeneity using two complementary identification strategies: (1) peer firms’ lagged idiosyncratic equity returns as an instrument for peer innovation and (2) staggered changes in state-level corporate income tax rates as a quasi-natural experiment. Innovation output is measured using patent counts. We estimate negative binomial models and implement a two-step control function approach. Heterogeneity analyses examine the moderating roles of institutional cross-ownership, information uncertainty and industry competition.
We find evidence of positive peer effects on innovation output. Effects are stronger when peers share institutional blockholders, when uncertainty is higher and in more competitive industries. Patent citation flows indicate greater knowledge transfer among cross-owned peers.
We are the first to show that institutional cross-ownership strengthens industry peer effects on innovation output by facilitating information spillovers, offering new evidence on how common owners shape real corporate outcomes.
