Institutional investors, competition and corporate innovation: Evidence from Chinese listed firms

Jing Zhang, Kai Li and Cheryl Xiaoning Long

Economics of Transition and Institutional Change, 2024, vol. 32, issue 2, 583-615

Abstract: By adapting a well‐known model in the literature, the current paper sharpens the theoretical predictions on how competition intensity and institutional ownership interact to influence corporate innovation decisions, and adopts data from Chinese listed firms to empirically test the validity of two potential mechanisms. The split‐share reform of 2004–2005, whose timing and speed were largely beyond the firms' control, is used as a quasi‐natural experiment to address the potential endogeneity of institutional share. Similar to the existing results, we find support for the career concern mechanism rather than the lazy manager mechanism. But in addition to the complementary effects between institutional share and competition intensity on corporate innovation documented in their work, our findings also imply that competition discourages innovation when the share of institutional investors is low but encourages innovation when the institutional share is high. The opposite effects of competition on innovation with or without institutional shares is accounted for by the negative correlation between competition and innovation success, which is an assumption in our theoretical model that departs from the existing literature, but fits the reality of China's economic transition. Additional evidence relating listed firms' managerial turnover to their institutional shares is also in support of the career concern mechanism. Combined with the substantial increase in innovation after the split‐share reform, these findings demonstrate the strong positive role of institutional investors in encouraging innovation, but also offer more insight into the complex process that determines corporate innovation, especially where ownership structure is still in flux.

Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/ecot.12393

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ectrin:v:32:y:2024:i:2:p:583-615

Access Statistics for this article

More articles in Economics of Transition and Institutional Change from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().