How to effectively resolve overcapacity is a difficulty in supply-side structural reforms, the key to high-quality economic development in China and also a hot topic in academic research. In recent years, the Chinese government has proposed to establish a market-oriented long-term mechanism to resolve overcapacity. Based on the market-oriented perspective of common institutional ownership, this paper explores its effect of reducing overcapacity.

This paper finds that common institutional ownership significantly improves the capacity utilization of enterprises, which is still established after fully considering the endogeneity and robustness. Mechanism analysis shows that common institutional ownership improves capacity utilization by exerting synergistic and supervisory effects. Further heterogeneity analysis shows that the de-capacity effect of common institutional ownership is higher in enterprises with higher overcapacity and labor-oriented technology, in industries with higher aggregation, and in regions with more developed economy and higher marketization. The economic consequence test finds that the de-capacity effect of common institutional ownership leads to a significant reduction in the surging phenomenon of capacity expansion and vicious competition from the mesoscopic view. This paper not only provides a useful exploration for the long-term market-oriented mechanism to resolve excess capacity, but also provides new theoretical support and empirical evidence for the specific effect of common institutional ownership.

The main contributions of this paper are as follows: First, based on the premise of maximizing the investment portfolio value, it breaks through the principal-agent analysis framework on institutional investors from both “synergy”and “governance” perspectives, which demonstrates and validates the possible existence of synergistic governance and collusion of common institutional ownership. Second, it enriches the literature on the solution of micro-firm overcapacity and the economic consequences of common institutional ownership. This paper argues that common institutional ownership is an effective market-oriented mechanism to resolve the “Chinese-style” excess capacity, which expands the existing literature on how to reduce micro-firm excess capacity. At the same time, it enriches the economic consequence research of common institutional ownership from the perspective of capacity utilization. Third, it provides support for the formulation of government policies. Common institutional ownership could improve the capacity utilization of enterprises. As a result, the government should make full use of the synergies and governance advantages of common institutional ownership to create value. On the one hand, we should create an advantageous environment for common institutional ownership to build a long-term mechanism, which could resolve microscopic excess capacity and help China’s high-quality economic development. On the other hand, we should actively transform the government subsidy model, optimize the allocation of government resources, and effectively resolve excess capacity.