Friend or Foe? Institutional Investors and Firm R&D: The Moderating Effect of Female Executives

Abstract

Innovation financing is crucial to the firm’s technological advancement and sustainable development, yet how does institutional investors affect firm innovation behaviors, and the contingent impact of top management team (TMT) diversity on this relationship, are still on debating. Drawing from literature on institutional investors, firm innovation, and the upper echelons theory, we empirically investigate the impact of institutional shareholding on firm’s R&D, and the moderation effect of female executives by employing a multiple panel dataset covering 2,066 China’s A-share listed companies from 2011 to 2019. Results show that 1) introducing institutional investors significantly improves firm’s R&D, while when the shareholding ratio passes a certain point (17.79%), it turns to inhibit R&D, and 2) the presence of women in the TMT mitigates this relationship. Additional analysis finds that 3) the curvilinear impact of institution ownership is consistent regarding on firm’s innovation performance, and furthermore 4) institutions are more effective in stimulating R&D in state-owned enterprises (SOEs) than that of private-owned enterprises (POEs). This study reveals the double-edged sword impact of institutional investors on firm R&D investment, reconciles controversial arguments on their role in corporate management. It also fills the gap between female executives on institutional shareholders and firm’s R&D, providing meaningful context-based evidence for the upper echelons theory and gender research. Practically, this paper suggests that government from emerging markets should continue encouraging institutions to participate in the capital market as a powerful tool to promote innovation and the reform of SOEs, while keep watch its dark side; and firms need to further embrace diversity in strategic management, and leverage the important value of female leadership in utilizing multiple sources for technological innovation.