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The effects of institutional investors and their contestability on firm innovation: Evidence from Chinese listed firms

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  • Zhang, Dan
  • Pan, Xiaofei
  • Ma, Shiguang

Abstract

We investigate the effects of institutional investors and their contestability with controlling shareholders on firm innovation. Using a large sample of Chinese listed firms from 2003 to 2017, we find that when the ownership of domestic mutual funds is comparatively larger, their contestability with controlling shareholders is strengthened, which enhances business innovation. However, Qualified Foreign Institutional Investors do not have such significant contestability effects on firm innovation. These results are robust after correction for potential endogeneity issues. Furthermore, the effects of domestic mutual funds' contestability are weaker for short-term mutual funds and quasi-indexers, and for firms where the controlling ownership is higher. The effects of domestic mutual fund contestability are stronger in firms with less analyst coverage. Overall, our findings suggest that the influence of institutional investors is subject to their identities as well as their contestability with controlling shareholders.

Suggested Citation

  • Zhang, Dan & Pan, Xiaofei & Ma, Shiguang, 2023. "The effects of institutional investors and their contestability on firm innovation: Evidence from Chinese listed firms," Research Policy, Elsevier, vol. 52(10).
    • Handle: RePEc:eee:respol:v:52:y:2023:i:10:s0048733323001567
    DOI: 10.1016/j.respol.2023.104872
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    More about this item

    Keywords

    Domestic mutual funds; QFIIs; Contestability; Firm innovation; China;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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