Does bank shareholding impact corporate innovation? Evidence from China

Corporate innovation is an engine of economic development, while bank shareholding is the phenomenon of having a bank as a shareholder. Their relationship, however, has been underexamined. We provide the first study on the direct impact of bank shareholding on corporate innovation. Using patents granted to Chinese firms from 1999 to 2013, our findings suggest that bank shareholding significantly contributes to corporate innovation. Additional analysis suggests that easing financial constraints can facilitate the positive impacts of bank shareholding on corporate innovation. We also find that bank shareholding works better when firms have effective external monitoring and when they are nonstate-owned firms with nonstate-owned banks as shareholders. We contribute to the literature by showing that (1) despite the restrictions some countries impose on bank shareholding, allowing it could be a good economic policy for promoting corporate innovation, and (2) successful corporate innovation requires proper monitoring and incentives.