Ownership Change and Firm Innovation: The Mediating Role of Interest Alignment

Although many studies suggest a strong link between ownership and corporate strategy, little research has examined how ownership change matters for firm innovation. This paper leverages the context of privatization to study how firms' transition from state ownership to private ownership shapes innovation. We argue that privatization helps to alleviate not only traditional principal-agent conflicts, but also principal-principal conflicts in firms of concentrated ownership, leading to greater innovation. Exploiting a major privatization reform in China, we show that privatization enhances firm innovation and that this effect is mediated by interest alignment between firm owners and managers as well as that between controlling and minority shareholders. This study contributes to a dynamic view of ownership and innovation by delineating the underlying mechanisms through which privatization affects innovation.