No Root No Fruit: The Impact of a Divergence Between Ownership Concentration and Board Composition on Corporate Innovation

ABSTRACT Research Question/Issue This study investigates the impact of an underexplored dimension of board characteristics, that is, the divergence between ownership concentration and board composition (hereafter, OB divergence), on corporate innovation. Research Findings/Insights Using a sample of Chinese listed firms from 2007 to 2021 and firm‐ and year‐fixed‐effects regressions, we find that OB divergence is negatively associated with corporate innovation output. Mechanism analyses provide evidence consistent with financial reporting opacity and managerial agency costs as channels through which OB divergence impedes corporate innovation. Cross‐sectional analyses demonstrate that the adverse effect of OB divergence is more pronounced in geographically dispersed firms and in firms with weaker market power, consistent with the view that lower information transparency and weaker access to external capital amplify this adverse effect. We also find that such divergence is more detrimental to innovation when large shareholders have stronger monitoring incentives, when independent directors have less influence, and when other governance mechanisms are relatively weaker. Theoretical/Academic Implications Our study uncovers the negative impact of an underexplored dimension of board structure on corporate innovation and provides novel evidence on the governance role of large shareholders, a role that has received relatively less attention in prior research emphasizing large shareholders' expropriation of minority shareholders. Practitioner/Policy Implications Our paper highlights the need to reassess the governance role of large shareholders and avoid an overemphasis on minority investor protection that may unintentionally weaken large shareholders' incentives and ability to monitor management. Policymakers should also strengthen the monitoring capacity and influence of independent directors, particularly in emerging markets.