By using the panel data of Chinaís
high-tech listed companies in 2013-2018, this paper shows common funds as active institutional
investors significantly promotes firmsí R&D investment. For every 10
percentage point increase of common fund ownership rate, high-tech firmsí 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 firmsí innovation productivity measured by the number of patents gained per
million R & D expenses. Further research suggests institutional investors
affect high-tech firmsí innovation through two channels. In the corporate governance channel, institutional investors raise
firmsí 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 firmsí equity refinancing. Every 10 percentage point increase of common fund ownership rate
raises the likelihood of firmsí seasoned equity offerings in the following
three years by nearly 1 percentage point.
JEL classification numbers: G32, G23, G14.
Keywords: institutional investors, firm innovation, corporate governance, capital funding capacity.