Abstract:

In this study, we analyze the network structure of institutional investors and examine how institutional investor cliques affect corporate innovation. Using a large sample of Chinese firms, we find that clique ownership is positively associated with innovation input and output. This clique effect is stronger among firms characterized by non-state ownership, more severe agency problems, and CEO duality, suggesting that governance environment matters. We also document that product market and capital market pressures, captured by product market competitiveness and stock liquidity, strengthen the baseline effect. To ameliorate endogeneity concerns, we show that our inferences are robust to more granular fixed effects, an instrumental variable approach, propensity score matching, and a Heckman correction. Exploiting the Mainland China Hong Kong Stock Connect program as a quasi-natural experiment, we implement a difference-in-differences design and find that the effect of clique ownership becomes more evident after firms enter into the Connect program. Mechanism tests reveal that cliques improve innovation incentives through higher information transparency and fewer forced CEO turnovers, and they enhance innovation capability through more efficient innovation investment and higher employee innovation productivity. Evidence on institutional site visits is consistent with a more active institutional monitoring environment around firms with higher clique ownership.

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Primary Track: Innovation

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Dr. Zhuoxiu Xia