Insurance funds’ shareholding and firm innovation

Insurance companies’ investment in equities has attracted considerable scholarly attention in recent years. Insurance funds focus on the future performance of enterprises, while innovation is the driving force behind the enterprises long-term development. However, there is little evidence in the existing literature on whether insurance funds’ shareholding can affect firm innovation. Using the data on China’s listed companies over the period of 2007–2018, this article empirically examines the correlation between insurance funds’ shareholding and firm innovation. Results show that companies with insurance funds’ shareholding have more research and development investment and patent output compared to those without. The more shares insurance funds hold, the more companies invest in innovation, although in the short term. Further analyses show that firms are less innovative after insurance funds cancel shares. In addition, the positive association between insurance funds’ shareholding and firm innovation is more pronounced for firms with a lower management shareholding ratio, which means that insurance funds’ shareholding can reduce managerial myopia. Mechanism tests show that: first, insurance funds’ shareholding promotes firm innovation by reducing corporate financialisation; second, insurance funds’ shareholding promotes firm innovation by alleviating financing constraints; and finally, the competing explanation that improving internal control can serve as a mechanism through which insurance funds’ shareholding affects firm innovation fails the test. This article contributes to a better understanding of how insurance funds’ shareholding influences corporate innovation.