How Does Institutional Investor Cooperation Promote Corporate Innovation? —Perspective from Mutual Fund Network Community

Under the current governance reform goal of innovation-driven high-quality development in China,mobilizing institutional investor shareholders to actively participate in corporate governance is an important incentive mechanism.However,due to the “strong speaking right of controlling shareholders and weak speaking right of institutional investors” in  the capital market,the participation of institutional investors in corporate governance in China still confronts many restrictions.For institutional investors with low shareholding,their institutional ability in information collection,data analysis,and governance organization brings little feedback and effect.However,institutional investors can choose to jointly cooperate in corporate governance,which may alleviate the problem of insufficient shareholder rights of individual investors and strengthen the total governance effect.Therefore,this paper aims to analyze the behavioral mechanism and economic consequences of how institutional investors cooperate to strengthen corporate governance effect theoretically and empirically.

In theoretical research,we construct a sequential game model equilibrium to describe the cooperative behavior of mutual funds.Individual fund needs to select a limited number of adjacent funds to conduct governance cooperation under the constraint of behavioral energy ceiling,and maximize the corresponding governance benefits on her own portfolio.The equilibrium result of the cooperative game shows that the cooperation decisions among individual funds will form in the distribution characteristics as different net communities.The funds in the same network community will have high-quality cooperation relationship in governance,and can effectively promote corporate innovation.

In empirical research,we define the information associations between paired funds in the same network community as cooperative relationships,and define the information associations between funds in different net communities as non-cooperative relationships.Using the innovation data of Chinese listed companies and the fund holding structure data from 2007 to 2021,this paper obtains the following empirical results.First,this paper finds that the intensity of cooperative relationships for shareholding funds is significantly positively correlated with the level of future corporate innovation activities,indicating that there is a governance cooperation effect among individual institutional investors and it has an important incentive effect on corporate innovation.Second,further research on the cooperation behavior among funds finds that there exist two types of specific cooperation channels,namely “Joint Site-visiting” and “Synchronous Trading”.“Joint Site-visiting” refers that two funds with community cooperation relationship have a higher probability of jointly participating in site-visiting on target listed company on the same day than funds without cooperation relationship.“Synchronous Trading” refers that two funds with community cooperation relationship that tend to trade securities in a similar direction and proportion.Third,further examination on cooperation effect of funds in the same network community structure shows that the governance incentive of cooperative funds is affected by the governance willingness of institutional investors.Funds with stronger cooperation willingness can urge both parties to participate in “Joint Site-visiting” more frequently,and strengthen the incentive effect on the innovation activities of listed firms.

The conclusion of this paper has the following contributions.First,this paper deepens the understanding of institutional investor information network structure.This paper finds that the competition and cooperation of rational institutional investors for information resources is the internal economic reason for the formation of information network structure.In the net community structure of institutional investors proposed in this paper,the information competition behavior of institutional investors for governance cooperation chances is significantly different from the characteristics of information-sharing behavior.For example,the relationships on network community cooperation are exclusive,and need to be agreed by both parties,and cannot be transferred to third parties.Second,this paper extends the mechanism theory of institutional investors' participation in corporate governance.Based on the reality that individual institutional investors in  the Chinese capital market have weak speaking rights,this paper further studies the cooperation mechanism of institutional investors in corporate governance.We find that the cooperative governance behavior of institutional investors under the structure of network community can significantly strengthen the governance effect on the corporate,which can enhance the governance willingness of institutional investors and provide a new research perspective on corporate governance cooperation.

The findings of this paper have several important implications for market regulators,institutional investors and listed companies.First,for market regulators,this paper shows that encouraging cooperative behavior of institutional investors can alleviate the imbalance state of governance right in the market and help stimulate the modernization of China's market governance ability.Meanwhile,comprehensively cultivating and developing institutional investors with different investment styles in the market can stimulate more cooperative governance on listed firms.Second,for institutional investors,this paper shows that asset management managers need to overcome the negative thinking of “free riding”,and shift from passive shareholding to active supervision,playing an effective role in corporate governance through cooperative behavior.Third,for listed corporate,they can provide more convenient cooperation environment and communication platform for institutional investors,which can help in reforming the existing governance environment and effectively supervising the behavior of controlling shareholders.