Abstract/Summary

This study investigates whether and how boards of directors of Chinese listed manufacturing firms utilise different share trading types as mechanisms for their firms’ product innovation by employing in-depth interviews targeting board members of 25 listed manufacturing firms in China from December 2021 to June 2022. The data analysis revealed that innovation, in general, and product innovation, in particular, plays a critical role to these firms’ survival and growth. Despite the variation in innovation investment across firms because of the impact of firms’ specific factors determined by their unique internal and external environment regarding contingency theory, the innovation investment is still much lower than in developed countries with less than 10% of total revenues. These firms have implemented share buyback, M&As, including stock for stock mergers, and seasonal equity offerings, but they have not engaged with insider trading recently because of their concerns with this practice’s legal liabilities and consequences on firms’ survival. These firms have mostly carried out share buyback for equity incentive programmes and for addressing the stock split problems instead of signalling, manipulating, investing, compensating shareholders, or other purposes. Share buyback practice has not been utilised as a direct mechanism for product innovation, but it has indirectly improved product innovation through the incentive programme that mitigates agency conflicts, and thus improves the management’s performance, including the R&D team members’ performance. These firms have also implemented M&A and SEOs to boost innovation, but the degree to which M&A and SEOs was used to support innovation is still limited. These firms have mostly used M&A to acquire innovation capabilities abroad and only issued additional shares to raise funds for product innovation when other sources of funds are unavailable. This study offers several significant contributions to both theory and practice.