Private equity market development, state ownership, and firm innovation: Evidence from China

In this work, we examine how private equity (PE) market development affects firm innovation. Using a large sample containing 2,568,137 firm-year observations of nonlisted firms in China and an ordinary least squares (OLS) regression model, we show that firms in regions with more developed PE markets exhibit a disproportionally higher level of innovation as proxied by patent quantity and quality. We further find that state ownership mitigates the positive effects of PE market development on firm innovation. Moreover, this mitigating effect of state ownership is more pronounced during a politically uncertain period and in industries showing greater dependence on external finance or receiving less support from government policy. Our results are robust to matched sample analysis, alternative measures of PE market development and innovation, and instrument variable tests and analysis on the change of ownership.