Rent appropriation of knowledge-based assets and firm performance when institutions are weak : A study of Chinese publicly listed firms

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

13 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)892-911
Journal / PublicationStrategic Management Journal
Volume38
Issue number4
Early online date23 Mar 2016
Publication statusPublished - Apr 2017

Abstract

Research summary: A firm's strategic investments in knowledge-based assets through research and development (R&D) can generate economic rents for the firm, and thus are expected to affect positively a firm's financial performance. However, weak protection of minority shareholders, weak property rights, and ineffective law enforcement can allow those rents to be appropriated disproportionately by a firm's powerful insiders such as large owners and top managers. Recent data on Chinese publicly listed firms during 2007–2012 were used to demonstrate that the expected positive relationship between knowledge assets and performance is weaker in transition economies when a firm's ownership is highly concentrated and its managers have wide discretion. Moreover, rent appropriation by insiders was shown to vary with the levels of institutional development in which a firm operates. 
Managerial summary: Investing in knowledge-based intangible assets (e.g., R&D) is an important value-creation activity for the firm. Such value creation process can be facilitated by large shareholders and powerful managers, who can then take an advantageous position with critical insider information on these valuable intangible assets and therefore enjoy more opportunities to appropriate more value from them, leaving less value for other minority shareholders. The value distribution becomes increasingly skewed against minority shareholders when the institutional protection for them is weak. Indeed, in a large sample of Chinese publicly listed firms, we found that R&D investment becomes less positively associated with firm financial performance with the presence of large shareholders, high managerial equity, or CEO/Chairman duality, especially in Chinese provinces with weak institutional development.

Research Area(s)

  • managerial discretion, principal–principal conflict, rent appropriation, research and development, transition economies

Citation Format(s)