Resource constraints, innovation capability and corporate financial fraud in entrepreneurial firms

Abstract

PurposePrevious studies have produced inconsistent findings regarding the effects of resource constraints on corporate illegal behavior. This study aims to explore how entrepreneurial firms can overcome the difficulties generated by resource constraints.Design/methodology/approachDrawing on insights from general strain theory and focusing on listed entrepreneurial firms, this study proposes that failure to obtain enough resources through listing generates strain in the managers of listed entrepreneurial firms, driving them to resort to corporate financial fraud as a solution. Nevertheless, such relationships between resource constraints and the likelihood of corporate financial fraud can be weakened by innovation capability, because innovation capability can generate more confidence in their managers and relieve their strains, thereby dissuading them from engaging in corporate financial fraud.FindingsAccording to our empirical results, both financial and human resource constraints are positively related to the likelihood of corporate financial fraud in listed entrepreneurial firms, but such effects can be mitigated by innovation capability.Practical implicationsThis study provides practical implications for both regulators and managers by indicating that although entrepreneurial firms with resource constraints are more likely to commit financial fraud, innovation capability could be a strategic approach to enhance managers’ confidence and relieve the strain.Originality/valueOur study contributes to the literature by enriching our understanding of the consequences of resource constraints in entrepreneurial firms and highlighting the strategic importance of innovation capability in mitigating such effects.