Ownership Concentration, CEO’s Technical Background and

Enterprise Innovation

YUPING SHI

Lyceum of the Philippines University Manila Campus,

Muralla Street, Intramuros Manila, 1002,

PHILIPPINES

enterprises with higher ownership concentration are more willing to hire a non-technology CEO. Ownership

concentration not only directly hinders enterprise innovation, but also indirectly hinders enterprise innovation

by hindering the selection and recruitment of technical CEOs. Further research shows that under the condition

of shareholding, technology CEOs significantly promote enterprise innovation, while under the condition of

non-shareholding, technology CEOs have no significant impact on enterprise innovation. Without serving as

chairmen, technical CEOs significantly promotes enterprise innovation, while serving as chairmen, technical

CEOs have no significant impact on enterprise innovation. However, in the samples with high ownership

concentration, there are significantly more companies where CEO serves as chairman and significantly fewer

companies where CEO holds shares, which indicates that companies with high ownership concentration do not

actively implement innovation incentive measures for CEOs. This study provides an important basis for

1 Introduction

Enterprise innovation is an important means to

enhance the core competitiveness of small and

medium-sized enterprises and a powerful driving

force to promote the high-quality development of

the national economy. As two key figures of

enterprise innovation, the influence of major

shareholders and general managers on enterprise

innovation cannot be ignored. In recent years,

foreign technology companies have successively

February 2021, Intel named technology veteran Pat

Gelsinger as its new CEO. However, from 2011 to

2019, the number of CEOs with technical

backgrounds in domestic private small and medium-

sized listed companies declined year by year. Under

the background of the urgent improvement of

technical innovation ability, why the small and

medium-sized private listed companies in China are

more and more reluctant to hire technical CEOs

with technical backgrounds? Are technology CEOs

shareholders, technology CEOs, and corporate

innovation together. Most of the existing literature

only studies the influence of shareholders on

enterprise innovation, or the influence of managers

on enterprise innovation, and there is a lack of

integration of managers, shareholders, and

enterprise innovation. First, this paper chooses the

CEO group of small and medium-sized enterprises

to study the relationship between technology CEOs

and enterprise innovation. As for the relationship

innovation, most literatures think that the

relationship is positive, [1], [2]. While a few

literatures think that the relationship is not

significant, [3]. The research conclusions are not

uniform, and the research objects are concentrated

in high-tech industries. The kinds of literature focus

on the technical backgrounds of executive teams,

rather than specific types of executives, such as

CEOs. Second, this paper studies the relationship

between ownership concentration and enterprise

relationship between the shareholding ratio of the

largest shareholder and the selection and

employment of technology CEOs, as well as the

mediating effect of technology CEOs between

ownership concentration and enterprise innovation,

which has not been studied in the previous

literature.

kinds of agency problems, that is, the agency

problem between major shareholders and minor

shareholders, general managers, and enterprise

innovation into a research framework to improve the

level of enterprise innovation. Therefore, this paper

takes the private non-financial listed companies in

the SME board from 2011 to 2019 as the research

object and studies the relationship between the

three. This study helps to explain the objective

phenomenon that the average technical background

of CEOs of private listed companies on small and

medium-sized boards has declined year by year in

2 Theoretical Analysis and Research

Hypothesis

enterprise, the technological experience and

cognition of CEOs will have a positive impact on

enterprise innovation, which is reflected in the

strong driving force of technological CEOs to carry

out enterprise innovation activities and reduce the

risk of enterprise innovation.

technological innovation. Internal motivation is the

source of power to ensure the vitality of enterprise

innovation. The innovation drive of technical CEOs

maximize their skills. So they are more likely to

focus on technological innovation and transform

their technological talents into new products through

innovative activities.

of innovation. The specific reasons are as follows.

First, the innovation opportunities found by

technical CEOs are more valuable. As technical

experts in this field, technical executives have deep

professional knowledge, a deeper understanding and

[15]. Second, enterprises with technical CEOs can

provide positive signals to the market and provide

financial guarantees for innovative activities.

Studies have found that academic CEOs can inhibit

enterprise R&D manipulation and thus improve

enterprise innovation efficiency, [16]. Therefore,

appointing a technology CEO can send a signal to

the market that the company is serious about

technology, increase investor confidence, and thus

obtain more financial support. Third, technical

relationship network formed by technical CEOs can

establish the “intangible innovation research

network”, bring technical social resources to the

enterprise, which is conducive to the enterprise

obtaining innovation information, timely adjusting

innovation deviation, and solve innovation

problems.

technical backgrounds promote enterprise

innovation.

they have a greater probability of abuse of power. In

the context of “one share, one right” in China, small

and medium-sized innovative private enterprises

adopt an equity-dominated governance structure,

and the shares are mostly held by the founders, [18].

A dominant share is not conducive to access to

innovation funds, and is not conducive to the

independence of innovation decisions, for the

companies. Therefore, ownership concentration may

negatively affect enterprise innovation.

concentration, to obtain private interests, large

shareholders will occupy the resources of listed

companies using tunnels, [19]. There are various

ways for major shareholders to hollow out listed

companies, including related transactions, fund

occupation, and cash dividend policy, [20]. A large

number of studies have found that the higher the

degree of ownership concentration is, the stronger

the motivation and ability of major shareholders to

hollow out listed companies [21], [22]. The

reflected in high investment, high risk, long cycle,

and easy to imitate. New products from research and

development to marketization, not only need

enterprises to invest a lot of human resources and

material resources, but also face the risk of failure

and free rider effect at any time. In an environment

where intellectual property protection is weak, the

innovation achievements of enterprises are more

likely to be modeled. Due to the high shareholding

ratio, if the innovation investment fails, the major

the independence of innovation decision-making of

the board of directors decreases. At present, the

main form of the governance structure of listed

companies is “one layer three meetings”, which

include shareholders’ meetings, boards of directors,

core of which is the board of directors. The

members of the board of directors who are elected

by the general meeting of shareholders decide on the

company’s business plan and investment plan. The

general meeting of shareholders is composed of all

shareholders and is the highest authority of the

company, exercising decision-making and

supervision power on behalf of all shareholders.

Due to the high proportion of shareholding, major

shareholders have larger voting power in the general

play its core role in corporate governance, [23].

Which greatly reduces the independence of

innovation decision-making of the board of directors

decreases. Second, major shareholders hold the

power to make decisions on important matters. The

separation of ownership rights and control rights

gives birth to the corporate governance mechanism,

but because of the scarcity of capital, and the

matching of responsibility and right, the

phenomenon of excessive centralization of major

make investment decisions. Small shareholders have

difficulty challenging large shareholders because of

their low shareholding ratio. The majority

shareholder essentially controls the company.

Although listed companies have established

corporate governance mechanisms in accordance

with regulatory requirements, whether this

mechanism can operate smoothly depends entirely

on the will of major shareholders. The over-

centralized major shareholders, limited by their

degree of risk concentration, [24], leading to major

shareholders using their control rights to intervene

in high-risk investment decisions and refusing to

invest in R&D innovation projects with large

amounts, long-cycle, and uncertain returns, [25].

concentration, the opinions of various stakeholders

are often represented by major shareholders, and it

is difficult to express their interest demands, which

makes it difficult to realize the scientific nature and

independence of innovation investment decisions.

ownership concentration inhibits enterprise

innovation.

China. The influence of culture on corporate

governance is just as important as the system, but

more deep-rooted and hidden. In the case of a low

level of social trust, influenced by the traditional

culture of “cronyism” in China, the board of

directors is more inclined to choose relatively

familiar personnel when hiring general managers.

The “one-share dominance” of corporate ownership

operational risks are more willing to recruit senior

executives from outside to supplement management

talent due to their greater demand for management

talent, [30]. That means hiring a CEO from outside

sends a signal that the company is riskier. Most

private listed companies prefer to select CEOs from

within the company. Technical internal members

have relatively weak interpersonal skills, and it is

difficult to form a familiar relationship with the

board members who decide the appointment and

greater impact on enterprise innovation than the

managers’ attributes, which may be because the

company’s attributes directly affect enterprise

innovation and indirectly affect enterprise

innovation through managers. The attributes of

enterprises are often the embodiment of the

willpower of major shareholders. Therefore, this

paper speculates that the influence of major

shareholders on enterprise innovation is not entirely

direct.

3 Empirical Research Design

The initial research samples of this paper are all the

private listed companies on the small and medium-

sized boards in Shenzhen Stock Market from 2011

to 2019, which are excluded according to the

following criteria: (1) Listed companies in the

financial industry; (2) ST and *ST companies

during the sample period; (3) The absence of

financial crisis on corporate innovation and ends in

2019 to eliminate the impact of the COVID-19

(1) Ownership concentration (Top1)

shareholding concentration variable is measured by

the proportion of the largest shareholder, [31]. This

index can reflect the decision-making ability and

control degree of major shareholders in the

enterprise and is a symbol of the power of discourse.

(2) CEO’s technical background (Tech)

the career background, professional background,

and academic background related to the main

business of the currently employed listed company,

the CEO is considered to have the technical

background, and the value is 1; otherwise, the value

is 0, [32].

(3) Control variables

for specific variable definitions. All control

variables are indicated in the following model and

table by the word “controls”.

Table 1. Definition and description of variables

In order to test hypothesis 1, referring to Chen and

Lian’s research, this paper builds model (1), [34].

The specific model is as follows. Fixed effects

control the annual and industry effects of the

to Fang, Wen, and Zhang’s research, this paper

builds model (2) - (4), [35]. The establishment of

the mediating effect of CEOs’ technical background

needs to meet the following three conditions: (1) the

regression coefficient of the equity concentration

variable (Top1) on enterprise innovation variable

(RD) reaches a significant level; (2) The regression

coefficient of the equity concentration variable

intermediate variable, reached a significant level. If

the coefficient of ownership concentration (Top1) is

not significant, CEOs’ technology background

(Tech) plays a complete mediating effect. When the

coefficient of ownership concentration (Top1) is

still significant, CEOs’ technology background

(Tech) plays a part in the mediating effect. The

following models are constructed respectively in

this paper:

(3)

(4)

that there are great differences in the innovation

investment levels of small and medium-sized private

enterprises in China. Among the 3476 observed

values, 1151 of them had an innovation investment

level above 0.045, accounting for 33.11%, which

indicates that the innovation investment level of

small and medium-sized private enterprises in China

is generally low. There is a big difference between

the maximum value of 0.698 and the minimum

value of 0.041 of ownership concentration (Top1),

which indicates that the shareholding ratio of the

concentration, the number of companies with

technology CEOs is significantly less, which proves

that companies with higher ownership concentration

are not inclined to hire a technical CEO. In the

group with higher ownership concentration, the

number of companies with a CEO as the chairman is

more, which preliminarily indicates that companies

with higher ownership concentration are not willing

to hire external CEOs, and are more inclined to

concentrate decision-making power in the hands of

shareholders do not want the CEO to become a

shareholder, to facilitate the major shareholders to

infringe on the interests of minority shareholders.

Table 2. Descriptive statistics

and listing years (Age) are positively correlated with

enterprise innovation. Because companies with

larger scales, higher growth, and longer-lasting life

have more economic strength and ability to invest in

innovation. However, operating performance

(ROA), net operating cash flow (OCF), and debt

level (Lev) are negatively correlated with enterprise

innovation. Because the source of enterprise

innovation funds is not mainly dependent on their

model was adopted.

enterprise innovation, that is, enterprises with a high

level of innovation investment may be inclined to

hire technical CEOs. To solve the possible problem

of sample self-selection, Heckman's two-stage

method is adopted in this paper. In the first stage,

the Logit model was used to estimate the probability

of hiring technical CEOs, and the inverse Mills ratio

(IMR) was calculated according to the estimated

results. In the second stage, IMR was substituted

into the original regression model as a control

Table 4) show that the regression coefficient of the

instrumental variable IV_Tech is significantly

negative at the 1% level, which indicates that the

instrumental variable IV_Tech is highly correlated

with the endogenous variable, and the instrumental

variable is effective. The results of the second stage

regression (column 2 of Table 4) show that the

regression coefficient of IMR is not significant, and

the technical background (Tech) of CEOs is

significantly positive at the 1% level, which

background variables of CEOs. Considering that

technological innovation requires the management

to find innovation opportunities, integrate

innovation resources, make innovation plans, and a

series of complex activities that need a certain

amount of time to complete. In other words,

technological CEOs have a time lag effect on

enterprise innovation. So the CEOs’ technology

background variable (Tech) is advanced one phase.

industrial mean is used to measure the enterprise

innovation level. The specific regression results are

shown in Table 7. (2) This paper remeasures the

level of enterprise innovation from the aspect of

innovation output. Based on the study of Chen et al.,

ln (total patent applications +1) is used to measure

enterprise innovation, [38]. The specific regression

results are shown in Table 8. The results in Table 5,

Table 6, Table 7, and Table 8 show that the results

in this paper are robust.

Table 7. Regression results after eliminating

innovation industry differences