How Do Institutional Investors Swell Firm Innovation: Evidence from China's High-tech Companies

By using the panel data of China's high-tech listed companies in 2013-2018, this paper shows common funds as active institutional investors significantly promotes firms' R&D investment. For every 10 percentage point increase of common fund ownership rate, high-tech firms' R & D expense ratio and R & D staff ratio would increase respectively by 0.1 and 2.3 percentage points. The impact is greater in more technology-intensive companies. But institutional investors have no influence on firms' innovation productivity measured by the number of patents gained per million R & D expenses. Further research suggests institutional investors affect high-tech firms' innovation through two channels. In the corporate governance channel, institutional investors raise firms' capitalisation ratio of R&D expenses to balance R & D investment and short-term earnings pressure and also increase management monetary compensation with stronger incentive for firm innovation. In the capital funding capacity channel, institutional investor shareholding as a signal for firm quality increases the chance of firms' equity refinancing. Every 10 percentage point increase of common fund ownership rate raises the likelihood of firms' seasoned equity offerings in the following three years by nearly 1 percentage point.