Institutional investors and the moral hazards of technology investment: Evidence from China

This study investigates the impact of institutional ownership on the moral hazards of technology investment in China from 2003 to 2017. We use firms' patent count data to test the quality and quantity of innovation, and apply a negative binomial regression to the baseline outcomes and a difference-in-difference model to control for endogeneity. The results show a significantly positive relationship between institutional investors and enterprise innovation. Particularly, mutual fund investors and qualified foreign institutional investors actively promote radical innovation, which minimizes the agency risks of enterprise innovation. However, bank and insurance fund investors tend to ignore the noise of technology investment, and instead prefer incremental innovation for enterprise growth. The study also analyzes the potential channels underlying these results. We find that institutional investors control CEOs' career concerns and offer insurance against earnings sensitivity. Additionally, their supervisory role has a significant impact in controlling the agency risks of managers. Therefore, we propose that high-tech enterprises should consider the advantages of institutional investment in improving their innovation trajectories. The findings offer important policy implications for China's indigenous innovation plans and indicate that institutional investors' enthusiasm in enabling radical enterprise innovation is a valuable instrument for economic growth.