Large shareholder–manager social capital and firms’ radical innovation: empirical evidence from Chinese firms

Abstract

ABSTRACT Prior corporate governance research focuses much attention on formal factors yet ignores such informal factors as social capital in the relationships between large shareholders and managers. Based on social capital theory, this study examines whether and in which circumstances social capital in the large shareholder–manager relationship affects firms’ radical innovation performance. Specifically, we propose that the relational dimension (i.e., relational trust) and the cognitive dimension (i.e., shared goals) of social capital influence firms’ radical innovation, and that these effects are moderated by internal managerial risk-taking and external environmental uncertainty. Drawing on data from 182 Chinese firms, we find that firms’ radical innovation has an inverted U-shaped relationship with relational trust between large shareholders and managers, and is positively related with their shared goals. Moreover, managerial risk-taking positively moderates the relationship between shared goals and radical innovation, whereas environmental uncertainty negatively moderates this relationship. Lastly, we find that environmental uncertainty positively moderates the inverted U-shaped relationship between relational trust and radical innovation. Overall, this study contributes to existing literature by not only finding the differential effects of distinct social capital dimensions on firm radical innovation but also revealing how these effects depend on internal and external contingency factors (i.e. risk-taking and environmental uncertainty).