Too much of a good thing? The nonlinear influence of noncontrolling large shareholders on corporate innovation

Abstract

PurposeNoncontrolling large shareholders can reduce the agency problem of executives and can reduce the expropriation or tunneling behavior of controlling shareholders, thereby promoting corporate innovation. However, too many noncontrolling large shareholders may also lead to excessive supervision, thereby inhibiting innovative activities that contribute to the long-term value of the firm. Research to date, however, has not examined the nonlinear impact of noncontrolling large shareholders on corporate innovation. Based on principal–agent theory and the too-much-of-a-good-thing (TMGT) effect, the authors discuss the inverted U-shaped influence of noncontrolling large shareholders on corporate innovation and the moderating effect of industry competition and corporate product diversification on the above relationship.Design/methodology/approachBased on the empirical data of Chinese listed companies from 2003 to 2017, the authors use the bidirectional fixed effects model to conduct empirical testing and robustness testing of the research hypotheses.FindingsThere is an inverted U-shaped relationship between noncontrolling large shareholders and corporate innovation; type I and type II agency costs play a mediating role between noncontrolling large shareholders and corporate innovation. In addition, firm product diversification weakens the inverted U-shaped relationship between noncontrolling large shareholders and corporate innovation, but industry competition has no significant moderating effect on the above relationship.Practical implicationsThis research has important implications for policy makers, to better activate corporate innovation vitality, and investors, to better choose investment targets. Specifically, investors and policy makers should be aware that an appropriate increase in larger noncontrolling shareholders can maximize the enthusiasm of firms for innovation and enhance corporate value, but they should also realize that having too many noncontrolling large shareholders may backfire.Originality/valueThis research helps the authors to understand the pros and cons of increasing the number of noncontrolling large shareholders more comprehensively and also helps to understand corporate innovation more comprehensively from a supervisory perspective. In addition, this research also enhances the explanatory and predictive power of the TMGT effect.

Earnings management and corporate efficiency pre- and post-IFRS: evidence from Taiwanese listed electronics corporations

“…The correlation values between DEA variables do not show any strong association (except for Cost and LIA; Cost and OE; LIA and OE; LIA and RIV; OE and RIV; OE and MV) because of the low magnitude values. Most of the correlation coefficients are within the range of multi-collinearity judgment value of 0.7 (Wan et al, 2021). Given that the DEA approach does not require a normal distribution assumption for data, this result suggests that this approach is a powerful research method (Liu and Lu, 2021).…”

“…The correlation values between DEA variables do not show any strong association (except for Cost and LIA; Cost and OE; LIA and OE; LIA and RIV; OE and RIV; OE and MV) because of the low magnitude values. Most of the correlation coefficients are within the range of multi-collinearity judgment value of 0.7 (Wan et al. , 2021).…”

Curvilinear effect of economic policy uncertainty on innovation in Chinese manufacturing firms: do managerial pay gaps matter?

“…We chose to comprehensively reflect firm innovation by standardizing R&D investment and patents and summing them. Here, R&D investment was measured as the ratio of R&D expenses to sales revenue (Xu et al , 2019), and patents were measured as the natural logarithm of the number of patents for inventions granted to the firm in the current year plus one (Howell et al , 2020; Peng et al , 2021; Wan et al , 2021). We did this because of the patents Chinese firms apply for (design patents, utility model patents and invention patents), and the first two are for low-quality innovation.…”

“…For instance, Jiang and Liu (2020) found support for their theory that EPU promotes firm innovation, while Bhattacharya et al (2017) came to the opposite conclusion. As firms are microsubjects of national innovation (Wan et al , 2021), their innovation actions play a key role in improving national innovation capacity, promoting national economic growth and building long-term national competitive advantages (Zhong et al , 2021a). Therefore, clarifying the relationship between EPU and firm innovation has important theoretical significance and practical value.…”

“…In turn, firms can conduct innovation to take advantage of the opportunities brought by EPU (Jiang and Liu, 2020; Meng and Shi, 2017) or avoid threats posed by EPU by reducing innovation (Bhattacharya et al , 2017; Xu, 2020). Too much of a good thing (TMGT) effect (Pierce and Aguinis, 2011) has pointed out that a “positive” variable exceeding the threshold cancels any positive effect on firms or even produces negative effects (Wan et al , 2021). Based on the TMGT effect, we suggest that EPU promotes firm innovation but that an EPU level exceeding a certain threshold inhibits innovation such that EPU and firm innovation display a nonlinear inverted U-shaped relationship.…”