Investee peer effect on firm Innovation: An uncertainty-reduction perspective

Scholars have extensively examined the impact of industry peers' innovation on focal firms' innovation. However, our study shifts the focus to a significant yet often overlooked category of peers: investee peers, which are firms that share common shareholders with the focal firm. Drawing on the open-system tradition of management research from the uncertainty-reduction perspective, we argue that common shareholders serve as conduits of information, enabling focal firms to access reliable and comprehensive data from their investee peers. As a result, the focal firm can reduce uncertainty by aligning its innovation activities with those of its investee peers. Using data from a sample of Chinese-listed firms between 2008 and 2017, we find empirical support for this argument. Specifically, we show that investee peers' innovation positively influences the focal firm's innovation outcomes. Furthermore, this positive relationship is strengthened when investee firms obtain more “High-Tech Enterprise” (HTE) certifications from the government and when shareholders hold a larger proportion of the focal firm's shares. Conversely, the relationship weakens when the focal firm is a state-owned enterprise (SOE). By focusing on investee peers rather than industry peers, our study contributes to the literature by emphasizing an information-based mechanism for peer effects in innovation. This mechanism is driven not by competition, as in the case of industry peers, but by the shared ownership structure within common shareholder networks.