Academics at Copenhagen Business School (CBS) have published a study showing that pension fund investment creates innovation at smaller Danish unlisted companies – a finding they argue lawmakers should heed before tightening pension investment rules.
In a release on 10 April, CBS said the research showed smaller firms that received pension fund investment were more likely to develop new technologies and products – especially green ones.
That correlation was strongest when pension funds took on long-term ownership and encouraged companies to think more strategically and longer-term, the Danish institution said.
Dario Pozzoli, professor at CBS and one of the study’s authors, said: “We can see that companies with pension funds as investors file twice as many patents on average, and their share of employees working in research and development is four percentage points higher.”
The paper, Pension Fund Investment and Firm Innovation, was published in the Journal of Corporate Finance earlier this year, and authored by Pozzoli along with David Pinkus, now of the Coller Pensions Institute in the UK but previously at CBS, and Cédric Schneider, associate professor in CBS’ department of economics.
Pozzoli said pension funds were now among the largest asset managers in many countries, and that in Denmark, pensions wealth was more than twice as much as annual GDP.
“At the same time, pension fund investments in Danish companies have grown by more than 50% over the past 10 years,” he said, adding: “Their investments can therefore play a real role in determining which companies grow and which projects are realised.”
“Generally, smaller companies have limited access to long-term capital compared to listed companies. At the same time, they make up a very large part of the Danish business community, which makes them particularly interesting,” Pozzoli said.
The CBS professor argued the findings were important in the political debate on regulation.
“If you impose overly strict limits on how pension assets can be invested, you may restrict the financing of innovative companies,” he said.
In their paper, the researchers cite three main barriers to corporate innovation investment – the short time horizon of many investors, managers’ preferring “empire building” strategies, avoiding risk, and the inherent uncertainty of innovation, which complicates investment decisions.
Pension funds may help overcome those barriers with their longer investment horizon, and by being able to serve as effective instruments to combat managers’ tendency to go for short-sighted, inefficient strategies, the academics say.
The researchers also list a number of research techniques they used to rule out the main findings being only due to selection.
