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Pension funds much more amenable than mutual funds to corporate heavy lifting, studies reveal

March 1, 2003

For more information, contact: Benjamin Haimowitz,

As last year's battle over the merger between Hewlett-Packard and Compaq went down to the wire, a striking difference emerged among the institutional investors that were involved.

In general, the big mutual funds and banks, including Hewlett-Packard's four largest shareholders (Capital Research, Barclays Global, Putnam Investment, and State Street Global) supported the merger. But the principal public pension funds involved (including the country's three largest, CalPERS, New York's Common Retirement Fund, and California's State Teachers' Retirement System) opposed it.

What accounts for this split? Undoubtedly, many things. But certainly a big issue raised by leading opponents of the merger was that it would threaten Hewlett-Packard's strong tradition of technological innovation in computer printing. And, on the basis of two new studies in the Academy of Management Journal, one would expect this concern to resonate a lot more with public pension funds than with mutual funds and investment banks.

On key matters of corporate strategy, the new research finds, these two types of institutional investors often favor opposite approaches, with major implications for the public at large. The studies provide what may be the strongest evidence yet to refute a widespread generalization of long standing -- namely, that, on matters of corporate strategy, institutional investors have a short-term perspective that thwarts enlightened management.

"Institutional investors are, emphatically, not all alike," comments Robert E. Hoskisson, a professor of management at the University of Oklahoma and a co-author of both studies. "Our research reveals clearly that public pension funds approach investing with a longer time horizon than that of professional investment funds, such as mutual funds and investment banks. Given the huge amount stock ownership involved, this is bound to make a profound difference."

Adds Laszlo Tihanyi, lead author of the study appearing in the Academy of Management Journal's April/May 2003 issue: "In general, public pension funds are much more likely than mutual funds or investment banks to support the heavy lifting that drives long-term progress not just for an individual company but for the greater society."

The new research finds that pension funds are significantly more likely than mutual funds and investment banks to support innovation achieved the hard way -- through companies' own research and development. In contrast, the mutual funds and banks tend to support innovation through acquisition of other companies.

As the researchers put it, professional investment fund managers "prefer more immediate returns, and acquiring firms with new products presumably produces returns more quickly than investing in the development of internal innovation."

In addition, the research finds that pension funds are significantly more likely than professional investment funds to support international expansion in industries that make high-technology products, such as computers, drugs, and electronics.

International expansion is vital to research and development in these fields, the researchers explain, because of the "underlying technological intensity," which a single national market may not suffice to support. International expansion enables firms to "allocate R&D costs over a longer period of time and thereby benefit from their patents and transfer technology."

This strategy tends to present problems, however, for mutual funds and investment banks. As the researchers observe, "Short-term performance declines are common in firms operating in high R&D industries, resulting in limited ownership positions in such industries by professional investment funds…Managers of professional investment funds are particularly vulnerable to short-term performance declines in their holdings because they are likely to be replaced when this occurs."

Both kinds of funds, the study finds, support international diversification. But for professional investment funds this is likely to take the form of short-term investment -- for example, entry into "countries with no previous international operations experience," a move likely to bring "significant positive abnormal returns shortly after the announcement of international acquisitions."

In contrast, pension funds' interest in international diversification stems from "their long-term performance orientation and buy-and-hold strategy."

The findings are based on data on corporate R&D and international diversification from hundreds of large American companies, combined with information on the amount of stock owned by different types of institutional investors in these companies.

The two studies are:

"Institutional Ownership Differences and International Diversification," by Laszlo Tihanyi and Robert E. Hoskisson, University of Oklahoma; Richard A. Johnson, University of Missouri, Columbia; and Michael A.Hitt, Arizona State University; Academy of Management Journal, April-May 2003

"Conflicting Voices: The Effects of Institutional Ownership Heterogeneity and Internal Governance on Corporate Innovation Strategies," by Hoskisson, Hitt, Johnson, and Wayne Grossman, Hofstra University, Academy of Management Journal, August-September 2002.

The Academy of Management Journal, a peer-reviewed publication now in its 46th year, is published every other month by the academy, the world's largest organization dedicated to management research and teaching, with almost 13,000 members in 60 countries.

Media Coverage:
The Corporate Library. When it comes to corporate heavy lifting, pension funds offer a lot more support than mutual funds, studies reveal. (Thursday, May 01, 2003).

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