Institutional Investors and Corporate Innovation: Executive Pay and Competition as Key Contingencies

Abstract

Innovation financing is crucial to corporate technological development and national innovation construction, yet how does institutional investors affect corporate innovation behaviors, and the contingent impacts of executive remuneration and market competition on this relationship, are still unclear. In this paper, drawing from literature on institutional investors, corporate governance and innovation, we empirically study the impact of institutions on corporate innovation and the moderation effects of executive remuneration and product market competition by employing a multiple panel dataset. Results show that 1) there is an inverted U-shaped relation, instead of a linear one, between institutional shareholding and corporate R&D investment, and 2) executive remuneration and market competition can enhance this correlation. Additional analysis finds that 1) the curvilinear relation remains regarding on innovation performance, and furthermore 2) product market competition has a positive impact on sales costs and marketing activities. This study reveals the double-edged sword impact of institutional ownership on corporate R&D, facilitating in-depth understanding of the role of institutional investors in corporate strategic management. And it fills the gap between executive remuneration and market dynamics on institutions and innovation, providing meaningful practical evidence for relevant theory and fields. Practically, this paper suggests that the government should properly encourage institutions to participate in corporate governance and the reform of development pattern, and firms need to further perfect executive remuneration system and take full advantage of market competition and external dynamics to support technological innovation.