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In this study, we analyze the network structure of institutional investor cliques and their effect on corporate innovation in a large sample of Chinese firms. Clique ownership is positively associated with innovation input and output, particularly among firms characterized by non-state ownership, more severe agency problems and CEO duality, suggesting that governance environment matters. This baseline effect is strengthened by product and capital market pressures, captured respectively by product market competitiveness and stock liquidity. To ameliorate endogeneity concerns, we show that our inferences are robust to more granular fixed effects, an instrumental variable approach, propensity score matching and Heckman correction. Using the Mainland China–Hong Kong Stock Connect program as a quasi-natural experiment and a difference-in-differences design, we find that clique ownership has a more salient effect after firms enter the Connect program. Mechanism tests reveal that cliques improve innovation incentives by increasing information transparency and reducing forced CEO turnovers and enhance innovation capability by increasing innovation investment efficiency and employees’ innovation productivity. Institutional site visit evidence is consistent with more active institutional monitoring of firms with higher clique ownership.
Deng et al. (Mon,) studied this question.