The Innovation‐Promoting Role of Governmental Stock Market Stabilization Funds

ABSTRACT Research Question/Issue This study exploits China's 2015 introduction of stock market stabilization funds (SMSFs) as a quasi‐natural experiment and uses panel data on Chinese A‐share–listed companies from 2010 to 2018 to assess the causal effect of SMSFs on corporate innovation through a difference‐in‐differences (DID) framework. Research Findings/Insights We find that China's SMSFs significantly enhance corporate innovation. Mechanism analyses indicate that SMSFs promote corporate innovation through the corporate governance effect (curbing managerial self‐interest and controlling shareholder tunneling) and the risk shock mitigation effect (reducing stock price crash risk). Furthermore, we find that the positive effect of SMSFs on corporate innovation is stronger when a firm is held by multiple SMSFs or when SMSFs increase their stock holdings. This effect is also more pronounced for state‐owned firms or firms receiving greater analyst attention. Finally, we find that China's SMSFs more effectively promote corporate innovation in regions with higher marketization levels and better government quality. Theoretical/Academic Implications First, we broaden the existing research on the relationship between government intervention and corporate innovation by providing new empirical evidence to clarify the debate on this relationship from the perspective of causal identification. Second, we link the literature on SMSFs and corporate innovation to enrich the understanding of the economic consequences of SMSFs, expand the existing research on institutional investors, and offer new perspectives for exploring the factors influencing corporate innovation. Practitioner/Policy Implications Our findings confirm the positive role of government intervention in promoting corporate innovation and demonstrate that moderate, well‐designed, and long‐term‐oriented government intervention in capital markets can yield beneficial outcomes. Our study provides valuable implications for the operation of SMSFs in other East Asian economies and for the healthy and sustainable development of capital markets in emerging economies.