Investigating the Relationship Between Entity Financialization, Managers’ Incentives, and Enterprise’s Innovation: Fresh Evidence From China

Abstract

The current study examines the relationship between financialization, managers’ incentives, and the enterprise’s innovation. Based on the principal-agent and incentive theories, this study proposes a research model with two management incentives as moderating variables between financialization and the enterprise’s innovation. First, we analyze the direct relationship between financialization and the enterprise’s innovation. Second, we examine the moderating effect of managers’ equity incentive and compensation incentives on the relationship between entity financialization and the enterprise’s innovation in high-tech/non-high-tech enterprises and state-owned and non-state-owned enterprises. This study covers the most recent updated data from both A-share listed companies in the Shenzhen and Shanghai stock exchange in China from 2009 to 2019. This study’s finding indicates a significant negative impact of entity financialization and the enterprise’s innovation. It means that the entity financial has a significant “crowding-out” effect on the enterprise’s innovation. This study also confirms that management incentives cannot effectively suppress a “crowding-out” impact of entity financialization on firm innovation because of the principal-agent severe problem in financialization. Finally, considering the heterogeneities of property rights and degrees of dependence on the enterprise’s innovation, a “crowding-out” effect of entity financialization on the enterprise’s innovation is more significant in high-tech and state-owned enterprises. Managers’ equity incentive significantly affects the enterprise’s innovation in high-tech enterprises, while the managers’ compensation incentive affects the enterprise’s innovation in state-owned enterprises. Our study could help the enterprise to improve the company manager’s incentive and provide the optimal assets allocation to improve the enterprise’s innovation ability. Lastly, this study provides significant policies and recommendations for the public sector high-tech enterprise and private sector high-tech enterprises. Moreover, policies and recommendations are fruitful for the public sector non-high-tech enterprise and private sector non-high-tech enterprise.

Equity incentive contract characteristics and company operational performance—An empirical study of Chinese listed companies

“…“Optimal Contract Theory” holds that the equity incentive plan can facilitate the convergence of the core interests of management and shareholders better, thus achieving the purpose of reducing agency costs to solve the “agency problem” of enterprises effectively. For example, research revealed that equity incentive exerts a positive influence on an enterprise’s innovation [ 26 ]. On the contrary, “Managerial Power Theory” holds that, owing to the existence of information asymmetry and "adverse selection" and "moral hazard" problems, the equity incentive plan is far from perfect.…”

“…Previous studies mostly discussed the economic consequences in terms of single variables, such as the mode, validity period, and intensity of equity incentive. For example, some researchers only selected the percentage of shares held by managers as a proxy for equity incentive [ 26 ]. This paper presents a comprehensive study on the above three factors of equity incentive and we used the panel data of Shanghai and Shenzhen’s listed companies for the regression test, so as to obtain more prudent and detailed research conclusions.…”

Corporate financialization, financing constraints, and innovation efficiency—Empirical evidence based on listed Chinese pharmaceutical companies

“…This paper refers to (43). This paper includes financial assets held for trading, derivative financial assets, other current assets, net loans and advances granted, net available-for-sale financial assets, net heldto-maturity investments, and net investment properties as components of financial assets.…”

A double-edged sword: The effects of R&D intensity and capitalization on institutional investment in entrepreneurial firms

“…First, firms cut R&D spending in response to short-term earnings pressure. From an agency theory perspective, corporate managers act out of selfinterest, using reductions in R&D intensity to meet short-term earnings targets (Osma and Young, 2009;Xu et al, 2022). The agency problem is also enhanced by analyst coverage and forecasts, especially when managers face an increase in employment risk after missing the forecasts (Gentry and Shen, 2013).…”