Tech-finance policies and innovation structure: The unintended role of transient institutional investors

Tech-finance policies are conventionally designed to alleviate financing constraints by attracting “patient capital”, yet we document a paradox: they inadvertently attract transient institutional investors. Exploiting China’s staggered rollout of Science and Technology Finance (STF) pilot policy as a quasi-natural experiment, we find that STF designation tilts high-tech firms’ innovation structure toward exploitative substantive innovation, without a detectable decline in exploratory output within our sample window. To explain this shift, we ground our analysis in the “incentives-for-experimentation” framework (Manso, 2011). We argue that the influx of transient capital alters managers’ implicit incentive contracts: the exit threat reduces the tolerance for early failure, while the demand for short-term performance increases the pressure for observable outputs. Mechanism tests yield patterns consistent with these dual pressures—disrupted R&D smoothing and increased financialization. This shift toward exploitative substantive innovation appears more pronounced in non-SOEs, firms with low analyst coverage, and regions with underdeveloped financial markets. Our findings underscore the unintended consequences of policy-induced transient capital in reshaping innovation structures, suggesting that policymakers should shift their focus from capital quantity to capital identity.