Rent appropriation of knowledge‐based assets and firm performance when institutions are weak: A study of Chinese publicly listed firms
| Author | Xuesong Geng,Cuili Qian,Yangxin Yu,Heli Wang |
| Date | 01 April 2017 |
| DOI | http://doi.org/10.1002/smj.2522 |
| Published date | 01 April 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 892–911 (2017)
Published online EarlyView 13 May 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2522
Received 24 April 2013;Final revision received1 November 2015
RENT APPROPRIATION OF KNOWLEDGE-BASED
ASSETS AND FIRM PERFORMANCE WHEN
INSTITUTIONS ARE WEAK: A STUDY OF CHINESE
PUBLICLY LISTED FIRMS
CUILI QIAN,1*HELI WANG,2XUESONG GENG,2and YANGXIN YU3
1Management Department, College of Business, City University of Hong Kong,
Kowloon, Hong Kong
2Strategy & Organization, Singapore Management University, Singapore, Singapore
3Department of Accountancy, City University of Hong Kong, Kowloon, Hong Kong
Research summary: A rm’s strategic investments in knowledge-based assets through research
and development (R&D) can generate economic rents for the rm, and thus areexpected to affect
positively a rm’s nancial performance. However, weak protection of minority shareholders,
weak property rights, and ineffective law enforcement can allow those rents to be appropriated
disproportionately by a rm’s powerful insiders such as large owners and top managers. Recent
data on Chinese publicly listed rms during 2007– 2012 were used to demonstrate that the
expected positive relationship between knowledge assets and performance is weaker in transition
economies when a rm’s ownership is highly concentrated and its managershave wide discretion.
Moreover, rent appropriation by insiders was shown to vary with the levels of institutional
development in which a rm operates.
Managerial summary: Investingin knowledge-based intangible assets (e.g., R&D) is an important
value-creation activity for the rm. 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 rms, we found
that R&D investment becomes less positively associated with rm nancial performance with the
presence of large shareholders, high managerial equity, or CEO/Chairman duality, especially in
Chinese provinces with weak institutional development. Copyright © 2016 John Wiley & Sons,
Ltd.
INTRODUCTION
The resource-based view of the rm contends that
heterogeneity in resources and capabilities can
Keywords: research and development; rent appropriation;
principal– principal conict; managerial discretion; transi-
tion economies
*Correspondence to: Cuili Qian, R11-210, Academic Building 3,
Management Department, City University of Hong Kong, Tai
Chee Avenue, Kowloon,HK. Email: cuili.qian@cityu.edu.hk
Copyright © 2016 John Wiley & Sons, Ltd.
best explain performance differences among rms
(Barney, 1986, 1991; Peteraf, 1993; Teece, Pisano,
and Shuen, 1997; Wernerfelt, 1984). In particular,
resources that are valuable, rare, or costly to imi-
tate have the most potential to generate economic
rents for a rm (Barney, 1991; Wernerfelt, 1984).
Knowledge-based assets, due to their causal ambi-
guity, rm-specicity, and social complexity, often
meet these criteria for rent generation. Thus rms
striving for competitive advantage often invest in
knowledge-based assets.
Rent Appropriation of Knowledge-based Assets and Firm Performance 893
If the economic rents generated through a rm’s
investment in knowledge-based assets such as
research and development (R&D) were mostly
appropriated by the rm’s shareholders, that
would probably be observable in measures of rm
nancial performance and shareholder value (e.g.,
Friedman, 1970). However, studies applying the
rent appropriation perspective have shown that
economic rents generated from knowledge-based
resources can be appropriated by various stake-
holders such as top managers and key knowledge
workers before they ow to shareholders (Coff,
1999, 2010; Crook et al., 2008; Werder, 2011).
Stakeholders’ ability to appropriate rents is deter-
mined by their bargaining power (Blyler and Coff,
2003). Coff (1999) has suggested, for example,
that the bargaining power of employees can be
strong in a rm whose competitive advantage is
knowledge-based because creating and deploying
the knowledge relies heavily on the employees’
efforts and specialized skills.
Of course, rent appropriation by stakeholders is
not limited to technology workers. Top managers
too can benet. Indeed, the focus of agency the-
ory is on the opportunistic behavior of top man-
agers and how they can appropriate rents from
the shareholders for their personal benet. How-
ever, in agency theory, the discussion of rent
appropriation by top managers has not consid-
ered much of their rent-generation ability; man-
agers attempt to maximize their private benets
at the expense of shareholders whenever possible
(Berle and Means, 1932; Jensen and Meckling,
1976). This view has been challenged by some strat-
egy scholars (Castanias and Helfat, 1991, 2001),
since rent generation and rent appropriation are
closely linked. Top managers’ ability to appropri-
ate rents provides incentives for them to gener-
ate rents in the rst place (Castanias and Helfat,
1991, 2001).
Based on an implicit assumption of classical
agency theory that all of a rm’s shareholders
have a homogenous interest in prot maximiza-
tion, most studies of rent appropriation have
focused on the conict between shareholders and
other stakeholders, considering all shareholders
as one homogeneous group. That assumption
has, however, been challenged by the results
of some recent studies, which have shown how
different groups of owners may have varying
performance goals and bargaining power. This can
lead them to pursue different strategies that enable
different groups of shareholders to appropriate
economic rents in diverse ways (David etal.,
2010).
At the intersection of the rent appropriation
research and corporate governance literature there
are at least two research gaps requiring close atten-
tion. First, various previous studies have looked at
rent appropriation in general, but it remains unclear
how the economic rents generated specically from
knowledge-based resources are appropriated and
distributed among different stakeholders. Among
the studies that have examined the relationship
between the knowledge-based initiatives such as
R&D investment and rm performance, very few
have investigated how any rents generated from
knowledge-based resources are appropriated by
key rm stakeholders such as top managers and
heterogeneous owners. Second, the rent appro-
priation process itself has not received sufcient
scholarly attention in different institutional con-
texts (e.g., David et al., 2010). Previous scholarly
enquiry has often focused on developed economies,
where there are efcient markets and institutions
that can protect the rights of shareholders and
other stakeholders. Yet the existing research has
not fully examined the phenomenon that in many
less developed economies powerful owners and
managers have more opportunities to pursue their
own agendas to the detriment of other stake-
holders (Su, Xu, and Phan, 2008; Young etal.,
2008).
This study was designed to examine the impacts
of large owners and top managers on the appro-
priation of rents generated from knowledge-based
resources and how those impacts vary across dif-
ferent levels of institutional development. The rent
appropriation perspective emphasizes that powerful
insiders can appropriate rents generated through a
rm’s value-creating activities. If national or local
institutions cannot constrain such powerful insid-
ers, minority shareholders may benet less than
they should from the rm’s value-creating activi-
ties. This will be more likely to happen for rms
with high knowledge-based resources and in transi-
tional economies with weak institutional protection
of minority shareholders. On the contrary, the rent
appropriation by insiders will be constrained if there
are strong institutions with more developed mar-
ket and legal systems to protect minority sharehold-
ers’ interests (e.g., Fan and Wang, 2006; Shleifer
and Vishny, 1997; Wang, Wong, and Xia, 2008).
For instance, a strong legal system can protect
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 892–911 (2017)
DOI: 10.1002/smj
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