Summary:
The Third Plenary Session of the 20th Central Committee of the Communist Party of China emphasized the importance of developing patient capital as a key driver of new quality productive forces and high-quality economic development. Despite the increasing policy interest in patient capital, the academic literature lacks a consistent identification strategy and systematic evidence regarding its economic consequences. This paper proposes a novel approach to identifying patient capital based on its defining characteristic: a strong tolerance for short-term negative performance in pursuit of long-term growth. Using comprehensive holdings and return data for Chinese mutual funds from 2010 to 2023, we construct a holdings-return sensitivity measure that captures the extent to which a fund adjusts its portfolio in response to short-term negative stock returns. Funds whose portfolio allocations are less sensitive to temporary negative performance are classified as patient funds. Unlike the existing literature, which primarily identifies long-term investors using portfolio turnover or holding periods, our approach directly measures investors’ willingness to tolerate short-term losses. Therefore, it aligns more closely with the conceptual definition of patient capital. We first validate the proposed measure. The identified patient funds exhibit significantly longer holding horizons, lower portfolio turnover, and smoother portfolio adjustments than other funds. These findings suggest that our measure successfully captures the dimension of patience in investment behavior. We then investigate the real effects of patient capital by examining how patient fund ownership influences corporate investment and innovation. Our baseline results show that firms with higher ownership by patient funds invest more and exhibit greater innovation. The results remain robust across a variety of specifications. These findings suggest that patient capital plays an important role in fostering the creation of long-term corporate value. To understand the underlying mechanism, we develop a unified framework centered on capital market pressure. We argue that patient investors reduce the short-term performance pressure faced by corporate managers because they are less inclined to withdraw capital or sell shares following temporary earnings disappointments. Consistent with this argument, we find that greater patient fund ownership alleviates capital market pressure and reduces managerial short-termism, thereby encouraging long-term investment and innovation. However, our analysis also reveals a potential drawback of patient capital. By reducing the threat of investor exit and weakening external disciplinary forces, patient ownership may also diminish governance pressure on managers. As a result, managerial opportunistic behavior may increase. Consistent with this prediction, we find that higher patient fund ownership exhibits a significant positive association with opportunistic insider share sales. These findings suggest that patient capital generates both benefits and costs through the same underlying mechanism: changes in capital market pressure. We further show that corporate governance serves as a crucial moderating role. The positive effects of patient capital on investment and innovation are substantially stronger in firms with better governance environments and stronger external monitoring mechanisms. Effective governance constrains managerial self-serving behavior and mitigates the adverse governance consequences stemming from lower market pressure. Therefore, the net effect of patient capital depends critically on the quality of a firm's governance environment. Based on the above findings, this paper proposes the following policy implications. First, patient capital should be identified more scientifically and its sources should be further broadened to support the cultivation of new quality productive forces and high-quality development. Long-term capital is not necessarily patient capital; rather, patient capital should be identified by its stronger tolerance to short-term declines in returns, so that targeted policy support can better strengthen the long-term value orientation of the capital market. Second, patient capital should serve as an important pillar in building a full life-cycle financial support system for technology-oriented enterprises, not only by supporting start-ups through angel investment, venture capital, and private equity investment, but also by leveraging long-term capital in multi-level capital markets to meet the financing needs of firms at different stages of development. Third, external governance mechanisms should be strengthened to ensure that patient capital can promote long-term value creation more effectively. Regulators should enhance information disclosure, strengthen capital market supervision, and increase the costs of violations while encouraging market monitoring through investor relations platforms, social media, and analyst coverage. These measures can foster a more transparent information environment that imposes sustained and effective external constraints on firms. This paper contributes to the literature in three important respects. First, it proposes a novel asset-side identification strategy for patient capital that is directly rooted in the conceptual definition of patience. Second, it distinguishes patient capital from traditional long-term capital and demonstrates that the tolerance for short-term losses, rather than low turnover itself, is the defining characteristic of patient investors. Third, it reconciles seemingly conflicting findings in the institutional investor literature by integrating both positive and negative governance consequences into a unified capital market pressure framework. Overall, our findings provide new evidence on the identification and economic consequences of patient capital and offer important implications for policies aimed at cultivating patient capital and promoting long-term value creation.
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