Supervision or Collusion? Common Institutional Ownership and Corporate R&D Manipulation

Abstract

R&D manipulation is a subjective manipulation of R&D accounting accounts by management that ignores the facts about R&D. It has a negative impact on the innovation performance of the company as well as the decision-making activities of external stakeholders. Hence, it is crucial to seek solutions to control this dishonest behaviour accurately. In recent years, the phenomenon of common institutional ownership has become increasingly widespread in the capital markets and has a significant impact on the strategic decisions of companies. There are currently two views on the corporate governance role of common institutional ownership: the synergistic governance effect and the collusive fraud effect. This paper selects Chinese A-share listed firms from 2009-2021 as a research sample to examine the impact of common institutional ownership on corporate R&D manipulation. The study found that common institutional ownership can inhibit corporate R&D manipulation. The higher the degree of their linkage and the greater the shareholding, the more pronounced the synergistic effect. The findings remained valid after testing using propensity score matching (PSM) and changing the sample period. Heterogeneity analysis shows that the inhibiting effect of common institutional ownership on corporate R&D manipulation is more pronounced in high-tech firms and firms which stay in the growth and maturity stage. This paper enriches the research on the economic consequences of common institutional ownership and provides management implications for implementing the innovation-driven strategy in China.