Roles of Relationships Between Large Shareholders and Managers in Radical Innovation: A Stewardship Theory Perspective

Abstract

Radical innovation is critical for firms to enhance their competitiveness. Whether they can achieve it, however, depends on organizational factors, including the corporate governance of the firm. In emerging economies in which shareholder protection is weak, large shareholders are widely used as an efficient governance mechanism to reduce agency problems. The literature on agency theory contains conflicting arguments regarding the role of large shareholders in firm innovation performance and has underestimated the role of social relationships between large shareholders and managers in determining the firm's innovation performance. By applying a stewardship theory perspective, this article argues that the characteristics of the relationship between large shareholders (owners) and managers, manifested as trust and shared goals, may explain variations in a firm's radical innovation. Drawing on data from 174 Chinese firms with large shareholders, our results show that trust has an inverted U‐shaped relationship with firm radical innovation, whereas shared goals exhibit a positive linear relationship with radical innovation. Shared goals further moderate the nonlinear effect of trust on radical innovation. Trust is almost negatively related to firm radical innovation when there is a low level of shared goals. However, when there is a high level of shared goals, the relationship between trust and firm radical innovation is first positive, then plateaus, and finally becomes negative. These findings advance our understanding of the role of the relationship between large shareholders and managers as a driver of radical innovation and contribute to the innovation literature by providing a nuanced understanding of the key factors that influence the effects of the social aspects of governance on firm radical innovation.