A mixed blessing? The curvilinear impact of institutional investors on corporate innovation in transitional economy

Extensive research acknowledges the vital role institutional investors play in fostering venture growth and organizational development toward innovation-driven sustainability. However, how institutional ownership affects corporate innovation is still under debate. This paper proposes that institutional ownership may exhibit a curvilinear, rather than linear, impact on corporate innovation performance, due to the paradoxical dynamics between resource superiority and capital myopia. Such tension is particularly salient in transitional markets undergoing significant institutional reforms and thus grappling with sustainability challenges. By employing a panel dataset of 1,884 publicly listed firms in China, the empirical results provide robust support that institutional ownership exerts an inverted U-shaped effect on innovation patenting. Moreover, this relationship is positively moderated by executive remuneration and market uncertainty, whereas institutional uncertainty has a negative moderating effect. Post hoc and mechanism analyses generate further evidence that the curving impact of institutional ownership on R&D contributes to the concave curvilinear relationship with innovation performance. This study elucidates why institutional financing represents a mixed blessing for corporate innovation and how this relationship is contingent upon varying degrees of executive incentives and external uncertainty, facilitating a more nuanced understanding of institutional investment. In this way, this paper offers valuable insights for executives, firms, and policymakers seeking to harness the potential of institutional investors in corporate innovation and sustainability.